NxStage Medical 10Q 2008 Q3 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2008


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 000-51567

NxStage Medical, Inc.

(Exact Name of Registrant as Specified in Its Charter)


Delaware		04-3454702
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

439 S. Union St., 5^thFloor, Lawrence, MA		01843
(Address of Principal Executive Offices)		(Zip Code)

(978) 687-4700
(Registrant’s Telephone Number, Including Area Code)
(Former Name, Former Address, and Former Fiscal year, If Changed Since Last Report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filero	Accelerated filerþ	Non-accelerated filero	Smaller reporting companyo
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ

There were 46,489,299 shares of the registrant’s common stock issued and outstanding as of the close of business on October 30, 2008.

NXSTAGE MEDICAL, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2008
TABLE OF CONTENTS


	Page
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets at September 30, 2008 and December 31, 2007		1
Condensed Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2008 and 2007		2
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2008 and 2007		3
Notes to Unaudited Condensed Consolidated Financial Statements		4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		15
Item 3. Quantitative and Qualitative Disclosures About Market Risk		27
Item 4. Controls and Procedures		27

PART II — OTHER INFORMATION		28
Item 1A. Risk Factors		28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		43
Item 6. Exhibits		43
SIGNATURES		44

Ex-31.1 Section 302 Certification of CEO
Ex-31.2 Section 302 Certification of CFO
Ex-32.1 Section 906 Certification of CEO
Ex-32.2 Section 906 Certification of CFO

NXSTAGE MEDICAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(Unaudited)


	September 30,			December 31,
	2008			2007
ASSETS
Current assets:
Cash and cash equivalents	$	32,879		$	33,245
Short-term investments		—			1,100
Accounts receivable, net		8,744			7,990
Due from affiliate		—			435
Inventory		35,689			29,965
Prepaid expenses and other current assets		1,694			2,455

Total current assets		79,006			75,190

Property and equipment, net		12,739			12,146
Field equipment, net		31,896			30,885
Deferred cost of revenues		22,406			14,850
Intangible assets, net		31,704			33,801
Goodwill		42,726			41,457
Other assets		1,239			2,057


Total assets	$	221,716		$	210,386


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	17,169		$	21,887
Accrued expenses		13,446			9,820
Due to affiliates		—			2,774
Current portion of long-term debt		8,290			54

Total current liabilities		38,905			34,535

Deferred revenue		27,861			19,530
Long-term debt		21,892			25,170
Other long-term liabilities		2,059			1,434


Total liabilities		90,717			80,669
Commitments and contingencies
Stockholders’ equity:
Undesignated preferred stock: par value $0.001, 5,000,000 shares authorized; zero shares issued and outstanding as of September 30, 2008 and December 31, 2007		—			—
Common stock: par value $0.001, 100,000,000 shares authorized; 46,488,607 and 36,771,893 shares issued and outstanding as of September 30, 2008 and December 31, 2007, respectively		47			37
Additional paid-in capital		354,042			311,172
Accumulated deficit		(223,484	)		(182,036	)
Accumulated other comprehensive income		394			544


Total stockholders’ equity		130,999			129,717


Total liabilities and stockholders’ equity	$	221,716		$	210,386

See accompanying notes to these condensed consolidated financial statements.

NXSTAGE MEDICAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(Unaudited)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
Revenues	$	30,466		$	11,625		$	93,087		$	30,030
Cost of revenues		25,684			15,161			79,872			36,589


Gross profit (deficit)		4,782			(3,536	)		13,215			(6,559	)


Operating expenses:
Selling and marketing		6,839			5,383			20,937			15,234
Research and development		1,986			1,467			6,474			4,321
Distribution		3,472			3,532			10,202			8,874
General and administrative		4,744			2,649			14,443			7,842


Total operating expenses		17,041			13,031			52,056			36,271


Loss from operations		(12,259	)		(16,567	)		(38,841	)		(42,830	)


Other income (expense):
Interest income		146			592			453			2,328
Interest expense		(1,017	)		(149	)		(2,908	)		(497	)
Change in fair value of financial instruments		(1,835	)		—			251			—
Other income (expense), net		138			—			(155	)		—

		(2,568	)		443			(2,359	)		1,831


Net loss before income taxes		(14,827	)		(16,124	)		(41,200	)		(40,999	)

Provision for income taxes		143			—			248			—


Net loss	$	(14,970	)	$	(16,124	)	$	(41,448	)	$	(40,999	)


Net loss per share, basic and diluted	$	(0.33	)	$	(0.54	)	$	(1.03	)	$	(1.38	)


Weighted-average shares outstanding, basic and diluted		45,067			30,024			40,204			29,667

See accompanying notes to these condensed consolidated financial statements.

NXSTAGE MEDICAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)


	Nine Months Ended
	September 30,
	2008			2007
Cash flows from operating activities:
Net loss	$	(41,448	)	$	(40,999	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		14,073			5,555
Stock-based compensation		4,456			2,310
Change in fair value of financial instruments		(251	)		—
Other		660			244
Changes in operating assets and liabilities:
Accounts receivable		(1,248	)		(1,889	)
Inventory		(24,511	)		(27,569	)
Prepaid expenses and other current assets		1,073			320
Accounts payable		(4,713	)		3,932
Accrued expenses and other liabilities		(3,375	)		1,337
Deferred revenue		8,331			12,716

Net cash used in operating activities		(46,953	)		(44,043	)


Cash flows from investing activities:
Purchases of property and equipment		(2,604	)		(2,352	)
Maturities of short-term investments		1,100			29,909
Purchases of short-term investments		—			(18,566	)
Decrease (increase) in other assets		818			(2,018	)

Net cash (used in) provided by investing activities		(686	)		6,973


Cash flows from financing activities:
Net proceeds from private placement sale of common stock		42,553			19,939
Proceeds from stock option and purchase plans		266			1,573
Proceeds from loans and lines of credit		5,000			—
Net repayments on loans and lines of credit		(62	)		(2,100	)

Net cash provided by financing activities		47,757			19,412

Foreign exchange effect on cash and cash equivalents		(484	)		82

Decrease in cash and cash equivalents		(366	)		(17,576	)
Cash and cash equivalents, beginning of period		33,245			49,959

Cash and cash equivalents, end of period	$	32,879		$	32,383


Noncash Investing Activities
Transfers from inventory to field equipment and deferred cost of revenues	$	19,271		$	22,764

See accompanying notes to these condensed consolidated financial statements.

NXSTAGE MEDICAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Nature of Operations

NxStage Medical, Inc., or the Company, is a medical device company that develops, manufactures and markets innovative products for the treatment of kidney failure, fluid overload and related blood treatments and procedures. The Company’s primary product, the NxStage System One, was designed to satisfy an unmet clinical need for a system that can deliver the therapeutic flexibility and clinical benefits associated with traditional dialysis machines in a smaller, portable, easy-to-use form that can be used by healthcare professionals and trained lay users alike in a variety of settings, including patient homes, as well as more traditional care settings such as hospitals and dialysis clinics. The System One is cleared by the United States Food and Drug Administration or the FDA, and sold commercially in the United States for the treatment of acute and chronic kidney failure and fluid overload. The System One consists of an electromechanical medical device (cycler), a disposable blood tubing set and a dialyzer (filter) pre-mounted in a disposable, single-use cartridge. Dialysate used in conjunction with this system is most frequently prepared using PureFlow SL hardware and premixed concentrate bags. Following the recent acquisition of Medisystems Corporation and certain affiliated entities, collectively the MDS Entities, the Company also sells needles and blood tubing sets primarily to the In-Center market for the treatment of end-stage renal disease, or ESRD.

As of September 30, 2008, the Company had approximately $32.9 million of cash and cash equivalents. In May 2008, the Company issued and sold approximately 5.6 million unregistered shares of common stock and warrants to purchase 1.1 million shares of its common stock for aggregate gross proceeds of $25.0 million. The sale of securities was transacted in a private placement to new institutional investors and other accredited investors managed by a single advisor, OrbiMed Advisors LLC, and represented the first tranche of a two-part $43.0 million financing. On July 31, 2008, at a special meeting of its stockholders, the Company obtained approval for and subsequently issued and sold on August 1, 2008 an additional 4.0 million shares of common stock and warrants exercisable for 800,000 shares of common stock to certain investors, some of whom are affiliates of the Company, among them a member of the Company’s board of directors, in exchange for aggregate gross proceeds of $18.0 million. The proceeds from both closings of the financing, net of transaction costs, were approximately $42.6 million.

In November 2007, the Company entered into a credit facility with Merrill Lynch Capital, a division of Merrill Lynch Business Services, Inc., which was acquired by General Electric Capital Corporation, or GE, consisting of a $30.0 million term loan and a $20.0 million revolving credit facility. The Company drew $25.0 million under the term loan at closing and drew the remaining $5.0 million on March 25, 2008. In February 2007, the Company received cash proceeds of $20.0 million from the sale of 2.0 million shares of its common stock to DaVita, Inc. or DaVita.

The Company has experienced negative operating margins and cash flows from operations and it expects to continue to incur net losses in the foreseeable future based on its projections. The Company believes that it has the required resources to fund its projected operating requirements at least through 2009. In addition, the Company, based on current projections, believes that it has the required resources to fund operating requirements beyond 2009 provided that it restructures its repayment schedule on its current GE credit facility. Future capital requirements will depend on many factors, including the availability of credit, rate of revenue growth, continued progress on improving gross margins, the expansion of selling and marketing and research and development activities, the timing and extent of expansion into new geographies or territories, the timing of new product introductions and enhancement to existing products, the continuing market acceptance of products, and potential investments in, or acquisitions of complementary businesses, services or technologies.

Basis of Presentation

The accompanying condensed consolidated financial statements as of September 30, 2008 and for the three and nine months ended September 30, 2008 and 2007, and related notes, are unaudited but, in management’s opinion, include all adjustments, consisting of normal recurring adjustments that the Company considers necessary for fair statement of the interim periods presented. The Company has prepared its unaudited, condensed consolidated financial statements following the requirements of the Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under these rules, the Company has condensed or omitted certain footnotes and other financial information that are normally required by U.S. generally accepted accounting principles (“GAAP”). The Company’s accounting policies are described in the Notes to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007 and updated, as necessary, in this Quarterly Report on Form 10-Q. Operating results for the three and nine months ended September 30, 2008 are not necessarily indicative of results for the entire fiscal year or future periods. The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries at September 30, 2008. The December 31, 2007 condensed consolidated balance sheet contained herein was derived from audited financial statements, but does not include all disclosures required by GAAP.

Medisystems Acquisition

Effective October 1, 2007, the Company purchased from David S. Utterberg, a member of the Company’s board of directors, the issued and outstanding shares of the MDS Entities. The Company refers to its acquisition of the MDS Entities as the Medisystems Acquisition. In consideration for the Medisystems Acquisition, the Company issued Mr. Utterberg 6.5 million shares of common stock, or the Acquisition Shares. The purchase consideration was allocated to the assets and liabilities acquired, identifiable intangible assets and goodwill based on their estimated fair values. These fair values were based on management’s estimates and assumptions.

The following unaudited pro forma financial information presents a summary of the consolidated results of operations of the Company and the MDS Entities as if the acquisition had occurred on January 1, 2007. The historical financial information of the Company has been adjusted to give effect to pro forma events that are (i) directly attributable to the acquisition and (ii) factually supportable. The pro forma condensed consolidated financial information is presented for informational purposes only and is not necessarily indicative of what the results of operations actually would have been had the acquisition been completed on January 1, 2007 (in thousands, except per share amounts):


	Three Months			Nine Months
	Ended			Ended
	September 30,			September 30,
	2007			2007
Pro forma net revenue	$	26,481		$	72,154
Pro forma operating loss		(14,672	)		(39,411	)
Pro forma net loss		(14,475	)		(37,912	)
Pro forma net loss per share, basic and diluted	$	(0.40	)	$	(1.05	)

2. Summary of Significant Accounting Policies

(a) Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation.

(b) Use of Estimates

The preparation of the Company’s condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

(c) Revenue Recognition

The Company recognizes revenue from product sales and services when earned in accordance with Staff Accounting Bulletin No. 104, or SAB 104,Revenue Recognitionand Emerging Issues Task Force Issue No. 00-21, or EITF 00-21,Revenue Arrangements with Multiple Deliverables.Revenues are recognized when: (a) there is persuasive evidence of an arrangement, (b) the product has been shipped or services and supplies have been provided to the customer, (c) the sales price is fixed or determinable and (d) collection is reasonably assured.

System One Segment

Prior to 2007, the Company principally derived revenue in the home market from short-term rental arrangements with its customers. These rental arrangements, which combine the use of the System One with a specified number of disposable products supplied to customers for a fixed price per month, are recognized on a monthly basis in accordance with agreed upon contract terms and pursuant to binding customer purchase orders and fixed payment terms. In the home market, as of September 30, 2008, rental arrangements continue to represent nearly half of the arrangements the Company has with its customers.

Beginning in 2007, the Company entered into long-term customer contracts to sell the System One and PureFlow SL hardware along with the right to purchase disposable products and service on a monthly basis. Some of these agreements include other terms such as development efforts, training, market collaborations, limited market exclusivity and volume discounts. Sales of the equipment and related items to the Company’s customers under these arrangements are considered multiple-element sales arrangements pursuant to EITF 00-21. When a sales arrangement involves multiple elements, the deliverables included in the arrangement are evaluated to determine whether they represent separate units of accounting. The Company has determined that it cannot account for the sale of equipment as a separate unit of accounting. Therefore, fees received upon the completion of delivery of equipment under these arrangements are deferred and recognized as revenue on a straight-line basis over the expected term of the Company’s obligation to supply disposables and service pursuant to the agreement which is five to seven years. The Company has deferred both the unrecognized revenue and direct costs relating to the delivered equipment, which costs are being amortized over the same period as the related revenue. As of September 30, 2008, the Company has deferred approximately $27.9 million of revenue and $22.4 million of costs for equipment sales, which principally relate to the home market.

The Company entered into a National Service Provider Agreement and a Stock Purchase Agreement with DaVita, a significant customer, on February 7, 2007, which pursuant to EITF 00-21, the Company considers to be a single arrangement. In connection with the Stock Purchase Agreement, DaVita purchased 2.0 million shares of the Company’s common stock for $10.00 per share, which on the date of the purchase represented a premium over the market price of $1.50 per share, or $3.0 million. The Company has recorded the $3.0 million premium as deferred revenue and will recognize this revenue ratably over seven years, consistent with its equipment service obligation to DaVita. The Company recognized revenue of $0.1 million associated with the $3.0 million premium for each of the three months ended September 30, 2008 and 2007 and $0.3 million for each of the nine months ended September 30, 2008 and 2007.

In the critical care market, the Company structures sales of the System One as direct product sales or as a disposables-based program in which a customer acquires the equipment through the purchase of a specific quantity of disposables over a specific period of time. The Company recognizes revenue from direct product sales at the later of the time of shipment or, if applicable, delivery in accordance with contract terms. Under a disposables-based program, the customer is granted the right to use the equipment for a period of time, during which the customer commits to purchase a minimum number of disposable cartridges or fluids at a price that includes a premium above the otherwise average selling price of the cartridges or fluids allowing the Company to recover the cost of the equipment and provide for a profit. Upon reaching the contractual minimum purchases, ownership of the equipment transfers to the customer. Revenue under these arrangements is recognized over the term of the arrangement as disposables are delivered. During the reported periods, the majority of our critical care market revenue is derived from supply contracts and direct product sales.

The Company’s contracts for the System One provide for training, technical support and warranty services to its customers. The Company recognizes training and technical support revenue when the related services are performed. In the case of extended warranty, the revenue is recognized ratably over the warranty period.

In-Center Segment

In the In-Center segment, nearly all sales to end users are structured through supply and distribution contracts with distributors. The Company’s distribution contracts for the In-Center segment contain minimum volume commitments with negotiated pricing triggers at different volume tiers. Each agreement may be cancelled upon a material breach, subject to certain curing rights, and in many instances minimum volume commitments can be reduced or eliminated upon certain events. In addition to contractually determined volume discounts, the Company offers rebates based on sales to specific end customers and discount incentives for early payment. The Company’s revenues are presented net of these rebates, incentives, discounts and returns.

The Company recognizes rebates to customers in its In-Center segment in accordance with Emerging Issues Task Force Issue No. 01-09,Accounting for Consideration given by a Vendor to a Customer (Including) Reseller of the Vendors Products.Customer rebates are included as a reduction of sales and trade accounts receivable and are the Company’s best estimate of the amount of probable future rebates on current sales. For the three and nine months ended September 30, 2008, the Company recognized $1.3 million and $4.0 million, respectively, as a reduction of sales in connection with customer rebates. At September 30, 2008, the Company has a $1.2 million reserve against trade accounts receivable for future rebates.

(d) Restricted Cash

The Company had $0.7 million at September 30, 2008 and $1.4 million at December 31, 2007 in standby letters of credit to guarantee annual value-added tax, or VAT, refunds in Italy. These amounts are restricted and classified as other assets.

(e) Fair Value of Financial Instruments and Concentration of Credit Risk

Financial instruments consist principally of cash and cash equivalents, accounts receivable, accounts payable and long-term debt. The estimated fair value of these instruments approximates carrying value due to the short period of time to maturity. The carrying amount of the Company’s long-term debt approximates fair value since the stated rate of interest approximates a market rate of interest.

The following table summarizes customers who individually comprise greater than 10% of total revenue for the periods shown below:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
Customer A		20	%		28	%		19	%		27	%
Customer B		37	%		—			40	%		—

Sales to Customer A are primarily in the System One segment and sales to Customer B are primarily in the In-Center segment. Half of all Customer B sales are to Customer A. Customer B represented 15% and 19% of total accounts receivable at September 30, 2008 and December 31, 2007, respectively.

(f) Inventory

Inventories at September 30, 2008 and December 31, 2007 consist of the following (in thousands):


	September 30,		December 31,
	2008		2007
Purchased components	$	16,847	$	12,211
Work in process		1,391		1,718
Finished units		17,451		16,036


Inventory	$	35,689	$	29,965

(g) Property and Equipment

Property and equipment is carried at cost less accumulated depreciation. Accumulated depreciation was $6.0 million and $3.7 million at September 30, 2008 and December 31, 2007.

(h) Field Equipment

Field equipment is carried at cost less accumulated depreciation. Accumulated depreciation was $15.1 million and $8.6 million at September 30, 2008 and December 31, 2007.

(i) Intangibles

Intangibles assets are carried at cost less accumulated amortization. Accumulated amortization was $2.8 million and $0.7 million at September 30, 2008 and December 31, 2007.

(j) Stock-Based Compensation

The captions in the Company’s condensed consolidated statements of operations for the three and nine months ended September 30, 2008 and 2007 include share-based compensation as follows (in thousands):


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2008		2007		2008		2007
Cost of revenues	$	231	$	48	$	795	$	133
Selling and marketing		465		286		1,674		737
Research and development		95		43		388		124
General and administrative		385		436		1,599		1,316

	$	1,176	$	813	$	4,456	$	2,310

(k) Deferred Cost of Revenues

Costs relating to equipment sold for which deferral of revenue is required are capitalized and amortized ratably over the same period in which the associated revenue is being recognized. Deferred costs at September 30, 2008 and December 31, 2007 totaled $22.4 million and $14.9 million, respectively, and are separately presented in the accompanying condensed consolidated balance sheets. Amortization of deferred costs charged to cost of revenues was $0.9 million and $0.4 million for the three months ended September 30, 2008 and 2007, respectively, and $2.5 million and $0.7 million for the nine months ended September 30, 2008 and 2007, respectively.

(l) Warranty Costs

For a period of one year following the delivery of products to critical care customers, the Company provides for product repair or replacement if it is determined there is a defect in the material or manufacture of the product. For sales in the critical care market, the Company accrues estimated warranty costs at the time of shipment based on contractual rights and historical experience. Warranty expense is included in cost of revenues in the condensed consolidated statements of operations. Following is a roll-forward of the Company’s warranty accrual (in thousands):


Balance at December 31, 2007	$	220
Provision		240
Usage		(261	)


Balance at September 30, 2008	$	199

(m) Income Taxes

The Company’s provision for income taxes represents the amount of taxes currently payable, if any, plus the change in the amount of net deferred tax assets or liabilities. The provision for income taxes of $143,000 and $248,000 for the three and nine months ended September 30, 2008, respectively, relates to the profitable operations of certain of our foreign entities.

(n) Net Loss per Share

Basic earnings per share is computed by dividing loss available to common stockholders (the numerator) by the weighted-average number of common shares outstanding (the denominator) for the period. The computation of diluted earnings per share is similar to basic earnings per share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potentially dilutive common shares had been issued. The following potential common stock equivalents were not included in the computation of diluted net loss per share as their effect would have been anti-dilutive (in thousands):


	September 30,
	2008		2007
Options to purchase common stock		5,367,504		3,162,243
Restricted stock units		23,139		13,845
Warrants to purchase common stock		1,911,111		—

Total		7,301,754		3,176,088

(o) Comprehensive Loss

Comprehensive loss consists of net loss and other comprehensive income (loss), which includes certain changes in equity, such as foreign currency translation adjustments, that are excluded from results of operations. The components of comprehensive loss are presented below for the periods presented in the condensed consolidated statements of operations (in thousands):


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
Net loss	$	(14,970	)	$	(16,124	)	$	(41,448	)	$	(40,999	)
Foreign currency translation (loss) gain		(523	)		187			(150	)		228

Comprehensive loss	$	(15,493	)	$	(15,937	)	$	(41,598	)	$	(40,771	)

(p) Derivatives and Financial Instruments

The Company accounts for derivative financial instruments in accordance with SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities, or SFAS No. 133. Derivatives are initially recorded at fair value, determined using the Black-Scholes option pricing model, with subsequent changes in fair value for those derivative instruments that do not qualify for hedge accounting recognized in earnings in the period such changes occur.

The Company accounts for warrants to purchase common stock in accordance with SFAS No. 150,Accounting for Certain Financial instruments with Characteristics of both Liabilities and Equity, or SFAS 150, and EITF 00-19,Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, A Company’s Own Stock, or EITF 00-19. Warrants and instruments with provisions that impose an obligation on the issuer to issue a variable number of shares that are not indexed to the price of the issuer’s stock are treated as a liability that is recorded at fair value with changes in fair value recognized in earnings in the period such changes occur.

(q) Recent Accounting Pronouncements

In December 2007, the FASB, issued SFAS No. 141(R),Business Combinations, or SFAS141 (R), a replacement of FASB Statement No. 141. SFAS 141(R) provides that, upon initially obtaining control, an acquirer shall recognize 100 percent of the fair values of acquired assets, including goodwill and assumed liabilities, with only limited exceptions, even if the acquirer has not acquired 100 percent of its target. As a consequence, the current step acquisition model will be eliminated. Additionally, SFAS 141(R) changes current practice, in part, as follows: (1) contingent consideration arrangements will be fair valued at the acquisition date and included on that basis in the purchase price consideration; (2) transaction costs will be expensed as incurred, rather than capitalized as part of the purchase price; (3) pre-acquisition contingencies, such as legal issues, will generally have to be accounted for in purchase accounting at fair value; (4) changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense; and (5) in order to accrue for a restructuring plan in purchase accounting, the requirements in SFAS No. 146,Accounting for Costs Associated with Exit or Disposal Activities, would have to be met at the acquisition date. SFAS 141(R) is effective on a prospective basis for all business combinations for which the acquisition date is on or after the beginning of the first annual period subsequent to December 15, 2008, with the exception of the accounting for valuation allowances on deferred taxes and acquired tax contingencies. SFAS 141(R) amends SFAS No. 109,Accounting for Income Taxes,such that adjustments made to valuation allowances on deferred taxes and acquired tax contingencies associated with acquisitions that closed prior to the effective date of SFAS 141(R) would also follow the provisions of SFAS 141(R). Early adoption of the provisions of SFAS 141(R) is not permitted. The Company is currently evaluating the effects that SFAS 141(R) may have on its consolidated financial statements.

In December 2007, the SEC issued Staff Accounting Bulletin No. 110, or SAB 110. SAB 110 amends and replaces Question 6 of Section D.2 of Topic 14,Share-Based Payment. SAB 110 expresses the views of the SEC staff regarding the use of the “simplified” method in developing an estimate of expected term of “plain vanilla” share options in accordance with SFAS 123(R).The use of the “simplified” method was scheduled to expire on December 31, 2007. SAB 110 extended the use of the “simplified” method for “plain vanilla” awards in certain situations. The Company currently uses the “simplified” method to estimate the expected term for share option grants as it does not have enough historical experience to provide a reasonable estimate due to the limited period the Company’s equity shares have been publicly traded. The Company will continue to use the “simplified” method until it has enough historical experience to provide a reasonable estimate of expected term in accordance with SAB 110.

In March 2008, the FASB issued SFAS No. 161,Disclosures About Derivative Instruments and Hedging Activities, or SFAS 161. SFAS 161 enhances the disclosure requirements for derivative instruments and hedging activities. This Standard is effective January 1, 2009. Since SFAS 161 requires only additional disclosures concerning derivatives and hedging activities, adoption of SFAS 161

will not affect the Company’s financial condition or results of operation.

In May 2008, the FASB issued SFAS No. 162,The Hierarchy of Generally Accepted Accounting Principles, or SFAS 162. SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements that are presented in conformity with generally accepted accounting principles in the U.S. The adoption of SFAS 162 is not expected to have a material impact on the Company’s consolidated financial statements.

3. Restructuring Activities

As a result of the Company’s acquisition of the MDS Entities on October 1, 2007, the Company established and approved a plan to integrate the acquired operations of the MDS Entities into the operations of the Company, for which the Company recorded $0.5 million in exit-related purchase accounting adjustments in 2007. The Company recorded $0.2 million as an adjustment to goodwill during the nine months ended September 30, 2008 relating to additional severance and relocation costs for certain employees of the MDS Entities. Additionally, the Company recorded $0.1 million in operating activities for the nine months ended September 30, 2008 relating to severance costs associated with the transition of manufacturing and service operations to Mexico. The following table summarizes the reserves related to exit activities that the Company has established and the related activity as of September 30, 2008 (in thousands):


	Severance			Relocation			Total
Balance at December 31, 2007	$	301		$	139		$	440

Restructuring charge		139			176			315
Cash payments		(375	)		(208	)		(583	)


Balance at September 30, 2008	$	65		$	107		$	172

4. Goodwill

During the third quarter of 2008, the Company finalized the purchase price allocation for the Medisystems Acquisition. During 2008, the Company increased severance and relocation accruals by $0.2 million accrued for $0.1 million of certain pre-acquisition contingencies and recorded adjustments to the fair value of certain other assets and liabilities acquired in the MDS Acquisition of $1.0 million all of which resulted in an increase to goodwill. The $1.3 million increase in goodwill during the nine months ended September 30, 3008 represents a noncash investing activity.

5. Financing Arrangements

Debt

On November 21, 2007, the Company obtained a $50.0 million credit and security agreement with a term of 42 months from a group of lenders led by Merrill Lynch Capital, a division of Merrill Lynch Business Services Inc., which was acquired by GE. The credit facility is secured by nearly all assets of the Company, other than intellectual property, and consists of a $30.0 million term loan and a $20.0 million revolving credit facility. The Company borrowed $25.0 million under the term loan in November 2007 and borrowed the remaining $5.0 million under the term loan on March 25, 2008. The Company used $4.9 million of the proceeds from the term loan to repay all amounts owed under a term loan dated May 15, 2006 with Silicon Valley Bank. Borrowings under the GE term loan bear interest equal to LIBOR plus 6% per annum, fixed on November 21, 2007 for our first borrowing (at a rate of 10.77% per year) and fixed on March 25, 2008 for our second borrowing (at a rate of 8.61% per year). Interest on the term loan must be paid on a monthly basis. Unless the Company is successful in its ability to restructure the payment schedule of this facility, beginning on February 1, 2009 the Company must repay principal under the term loan in 29 equal monthly installments. The Company will also be required to pay a maturity premium of $0.9 million at the time of loan payoff. The Company is accruing the maturity premium as additional interest over the 42-month term. The Company’s borrowing capacity under the revolving credit facility is subject to satisfaction of certain conditions and calculations of the borrowing amount. There is no guarantee that the Company will be able to borrow the full amount, or any funds, under the revolving credit facility. Any borrowings under the revolving credit facility will bear interest at LIBOR plus 4.25% per annum. There is an unused line fee of 0.75% per annum and descending deferred revolving credit facility commitment fees, which are charged in the event the revolving credit facility is terminated prior to May 21, 2011 of 4% in year one, 2% in year two and 1% thereafter.

The credit facility includes covenants that (a) require the Company to achieve certain minimum net revenue and certain minimum earnings before interest, taxes, depreciation and amortization, or EBITDA, targets relating to the acquired MDS Entities, (b) place limitations on the Company’s and the Company’s subsidiaries ability to incur debt, (c) place limitations on the Company’s and the Company’s subsidiaries ability to grant or incur liens, carry out mergers and make investments and acquisitions, and (d) place limitations on the Company’s and the Company’s subsidiaries ability to pay dividends, make other restricted payments, enter into transactions with affiliates and amend certain contracts. The credit agreement contains customary events of default, including nonpayment, misrepresentation, breach of covenants, material adverse effects and bankruptcy. In the event the Company fails to satisfy the covenants, or otherwise defaults under the loan, GE has a number of remedies, including sale of the Company’s assets, control of cash and cash equivalents and acceleration of all outstanding indebtedness. Any of these remedies would likely have a material adverse effect on the Company’s business. The Company is in compliance with all debt covenants as of September 30, 2008.

Annual maturities of principal under the Company’s debt obligations outstanding at September 30, 2008 are as follows (in thousands):


2008		14
2009		11,438
2010		12,475
2011		6,255

	$	30,182

6. Stockholders’ Equity

Common Stock, Preferred Stock and Common Stock Warrants

On May 22, 2008, the Company entered into a $43.0 million private placement agreement to sell an aggregate of 9.6 million shares of its common stock at a price of $4.50 per share and warrants to purchase 1.9 million shares of its common stock at an exercise price of $5.50 per share. The first tranche of the financing, consisting of approximately 5.6 million newly-issued and unregistered shares of common stock and warrants to purchase 1.1 million shares of the Company’s common stock, was sold on May 28, 2008 for aggregate gross proceeds of $25.0 million to certain accredited investors managed by a single advisor, OrbiMed Advisors LLC. The Company agreed to sell, subject to stockholder approval, the second tranche under the same terms to certain existing investors, some of whom are affiliates of the Company and include a member of the Company’s board of directors. Cash to purchase the second tranche of the financing was placed in escrow on May 28, 2008 until such time as the Company obtained stockholder approval.

On July 31, 2008, at a special meeting of its stockholders, the Company obtained approval for, and subsequently issued and sold on August 1, 2008, an additional 4.0 million shares of common stock and warrants exercisable for 0.8 million shares of the Company’s common stock in exchange for aggregate gross proceeds of $18.0 million. The proceeds from both tranches of the financing, net of transaction costs were approximately $42.6 million.

The warrants are exercisable at $5.50 per share with a term of 5 years expiring on May 28, 2013 and August 1, 2013 for the first and second tranche respectively; however, the exercise price of the warrants may remain at $5.50 per share or may be adjusted to $3.00 or $6.50 per share depending upon whether the Company achieves certain targets related to the number of ESRD patients prescribed to receive therapy with the NxStage System One as of December 31, 2008. The warrants also contain a net share settlement feature that is available to investors once the underlying shares are registered. Additional provisions require the Company, in the event of a change of control, to pay promptly to the warrant holder an amount calculated by the Black-Scholes option pricing formula. Such

payment is required to be in cash or shares in the same proportion that other stockholders receive in such change of control transaction.

The fair value of the warrants of $4.1 million at September 30, 2008 has been classified as a current liability on the Company’s balance sheet. The fair value at issuance was $3.3 million for the warrants issued on May 28, 2008 and $1.8 million for the warrants issued on August 1, 2008. The Company recognized $0.2 million loss and a $1.0 million gain in other expense, net during the three and nine months ended September 30, 2008, respectively, related to changes in fair value of outstanding warrants. These amounts were determined using the Black-Scholes option pricing model and calculated using the following assumptions: 65% volatility; expected term of 5 years; 3.2% risk-free interest rate; and 0% dividend. The fair value of the warrants represents a noncash financing activity.

The Company’s obligation, entered into on May 22, 2008, to issue 4.0 million shares of common stock and warrants to purchase 0.8 million shares of common stock in the second tranche meets the definition of a derivative instrument under SFAS 133 and was classified as a current asset on the Company’s balance sheet at June 30, 2008. The fair value of the derivative instrument upon issuance on May 22, 2008 was $1.3 million. The fair value of the derivative instrument upon settlement on August 1, 2008 was $0.6 million and was recorded in equity as a reduction of the total proceeds. These amounts were determined using the Black-Scholes option pricing model and calculated using the following assumptions: 76% volatility; expected term of 32 to 71 days; 1.9% risk-free interest rate; and 0% dividend. The Company recognized losses of $1.6 million and $0.7 million in other expense, net during the three and nine months ended September 30, 2008 related to changes in fair value of this derivative instrument. The fair value of the derivative instrument represents a noncash financing activity.

On October 1, 2007, the Company issued 6.5 million shares of its common stock at a price of $12.50 per share in connection with the acquisition of the MDS Entities as discussed in Note 1.

On February 7, 2007, the Company issued and sold to DaVita 2.0 million shares of common stock at a purchase price of $10.00 per share, for an aggregate purchase price of $19.9 million, net of issuance costs. The price of the Company’s common stock on February 7, 2007 was $8.50 per share, resulting in a $3.0 million premium, which was deferred and is being recognized ratably to revenue over a term of seven years as discussed in Note 2.

2005 Stock Incentive Plan and 2005 Employee Stock Purchase Plan

The Company grants options and restricted stock to its employees under its 2005 Stock Incentive Plan. As of September 30, 2008, the Company has reserved 7,086,587 shares of common stock for issuance under the 2005 Stock Incentive Plan and 39,487 shares for issuance under the Company’s 2005 Employee Stock Purchase Plan, or the 2005 Purchase Plan.

The Company’s 2005 Purchase Plan originally authorized the issuance of up to 50,000 shares of common stock to participating employees through a series of periodic offerings. An incremental increase of 50,000 shares was approved by the Company’s stockholders on May 30, 2007. Each six-month offering period begins in January or July. The first offering under the 2005 Purchase Plan began on January 3, 2006 and ended on June 30, 2006. On June 23, 2008 the Company amended its 2005 Purchase Plan to include an additional 50,000 shares as previously approved by the stockholders of NxStage Medical, Inc. in May 2008.

Other Compensation Plans

The Company maintains postemployment benefit plans for employees in certain foreign subsidiaries. The plans provide lump sum benefits, payable based on statutory regulations for voluntary or involuntary termination. Where required, the Company obtains an annual actuarial valuation of the benefit plans. The Company has recorded a liability of $1.5 million as other long-term liabilities at September 30, 2008 for costs associated with these plans. The expense record in connection with these plans was not significant for the nine months ended September 30, 2008 or 2007.

7. Segment and Enterprise Wide Disclosures

On October 1, 2007, the Company completed its acquisition of the MDS Entities. After careful evaluation of the business activities regularly reviewed by the chief operating decision-maker for which separate discrete financial information is available, management has determined that the Company has two reporting segments, System One and In-Center. Prior to January 1, 2008, the Company operated in one segment.

The segment information noted below for the period ended September 30, 2007 does not include any In-Center amounts since the acquisition of the MDS Entities did not occur until October 2007. The accounting policies of the reportable segments are the same as those described in Note 2, “Summary of Significant Accounting Policies.” The profitability measure employed by the Company and its chief operating decision maker for making decisions about allocating resources to segments and assessing segment performance is segment loss, which consists of sales, less cost of sales, direct selling, marketing and distribution expenses.

The Company’s management measures are designed to assess performance of these operating segments excluding certain items. As a result, the corporate reconciling items are used to capture the items excluded from the segment operating performance measures, including certain stock-based compensation expense and indirect distribution expenses. In addition, research and development, general and administrative, and other income and expense are not allocated to the segments, as they are managed centrally.

Within the System One segment, the Company sells the System One and related products in the home and critical care markets.

The home market consists of dialysis centers and hospitals that provide treatment options for patients that have ESRD, while the critical care market consists of hospitals or facilities that treat patients that have suddenly, and possibly temporarily, lost kidney function. The Company sells essentially the same System One cyclers and disposables within each market and some of the Company’s largest customers in the home market provide outsourced renal dialysis services to hospitals in the critical care market to which the Company sells System One cyclers and disposables. Sales of product to both markets are made through dedicated sales forces and products are distributed directly to the customer. Sales in the In-Center segment primarily consist of blood tubing sets and needles for hemodialysis and needles for apheresis. Nearly all In-Center products are sold through national distributors.

The Company’s reportable segments consist of the following (in thousands):


	System One			In-Center		Unallocated			Total
Three Months Ended September 30, 2008
Revenues from external customers	$	16,813		$	13,653	$	—		$	30,466
Segment (loss) profit		(5,374	)		2,277		(9,162	)		(12,259	)
Segment assets		81,668			17,067		122,981			221,716

Three Months Ended September 30, 2007
Revenues from external customers		11,625			—		—			11,625
Segment loss		(8,011	)		—		(8,556	)		(16,567	)
Segment assets		60,437			—		40,546			100,983

Nine Months Ended September 30, 2008
Revenues from external customers		47,914			45,173		—			93,087
Segment (loss) profit		(17,533	)		7,288		(28,596	)		(38,841	)
Segment assets		81,668			17,067		122,981			221,716

Nine Months Ended September 30, 2007
Revenues from external customers		30,030			—		—			30,030
Segment loss		(23,344	)		—		(19,486	)		(42,830	)
Segment assets		60,437			—		40,546			100,983

The following table presents a reconciliation of the total segment assets to total assets (in thousands):


	September 30,		December 31,
	2008		2007
Total segment assets	$	98,735	$	83,690
Corporate assets:
Cash and cash equivalents		32,879		33,245
Short-term investments		—		1,100
Property and equipment, net		12,739		12,146
Intangible assets, net		31,704		33,801
Goodwill		42,726		41,457
Prepaid and other assets		2,933		4,947

Total assets	$	221,716	$	210,386

8. Related-Party Transactions

On June 4, 2007, the Company entered into a stock purchase agreement with David S. Utterberg under which the Company agreed to purchase from Mr. Utterberg the issued and outstanding shares of the MDS Entities. The Company refers to its acquisition of the MDS Entities as the Medisystems Acquisition. Mr. Utterberg is a director and significant stockholder of NxStage. The Medisystems Acquisition was completed on October 1, 2007 and, as a result, each of the MDS Entities is a direct or indirect wholly-owned subsidiary of NxStage. In consideration for the Medisystems Acquisition, the Company issued Mr. Utterberg 6.5 million shares of common stock, which the Company refers to as the Acquisition Shares. As a result of the Medisystems Acquisition and the issuance of the Acquisition Shares to Mr. Utterberg, Mr. Utterberg’s aggregate ownership of the Company’s outstanding common stock increased to approximately 20%. In addition, the Company may be required to issue additional shares of common stock to Mr. Utterberg since, pursuant to the terms of the stock purchase agreement, Mr. Utterberg and the Company have agreed to indemnify each other in the event of certain breaches or failures, and any such indemnification amounts must be paid in shares of the Company’s common stock, valued at the time of payment. However, the Company will not be required to issue shares for indemnification purposes that in the aggregate would exceed 20% of the then outstanding shares of the Company’s common stock without first obtaining stockholder approval, and any such shares will not be registered under the Securities Act of 1933, as amended. An aggregate of 1.0 million of the Acquisition Shares were placed into escrow to cover potential indemnification claims the Company may have

against Mr. Utterberg. As of November 5, 2008, 0.5 million shares remain in escrow. In connection with the Medisystems Acquisition and as a result of Medisystems Corporation, one of the MDS Entities, becoming a direct wholly-owned subsidiary of the Company, the Company acquired rights under an existing license agreement between Medisystems and DSU Medical Corporation, or DSU, a Nevada corporation, which is wholly-owned by Mr. Utterberg. The Company refers to this agreement as the License Agreement. Additionally, as a condition to the parties’ obligations to consummate the Medisystems Acquisition, Mr. Utterberg and DSU entered into a consulting agreement with the Company dated October 1, 2007, which the Company refers to as the Consulting Agreement.

Under the License Agreement, Medisystems Corporation received an exclusive, irrevocable, sublicensable, royalty-free, fully paid license to certain DSU patents, or the Licensed Patents, in exchange for a one-time payment of $2.7 million. The Licensed Patents fall into two categories, those patents that are used exclusively by the MDS Entities, referred to as the Class A patents, and those patents that are used by the MDS Entities and other companies owned by Mr. Utterberg, referred to as the Class B patents. Pursuant to the terms of the License Agreement, Medisystems Corporation has a license to (a) the Class A patents, to practice in all fields for any purpose and (b) the Class B patents, solely with respect to certain defined products for use in the treatment of extracorporeal fluid treatments and/or renal insufficiency treatments. The License Agreement further provides that the rights of Medisystems Corporation under the agreement are qualified by certain sublicenses previously granted to third parties. The Company has agreed that Mr. Utterberg retains the right to the royalty income under one of these sublicenses.

The Company assumed a $2.8 million liability owed to DSU as a result of the acquisition of the MDS Entities. The amount owed represents consideration owed to DSU by the MDS Entities for the termination of a royalty-bearing sublicense agreement of $0.1 million and the one-time payment for the establishment of the royalty-free license agreement of $2.7 million. The Company paid $2.0 million of the liability owed during the quarter ended March 31, 2008 and the remaining liability of $0.6 million, net of receivable from DSU for reimbursements of costs related to the acquisition of $0.2 million, during the quarter ended September 30, 2008.

Under the Consulting Agreement, Mr. Utterberg and DSU agreed to provide consulting, advisory and related services for a period of two years following the consummation of the Medisystems Acquisition. In addition, under the terms of the Consulting Agreement, Mr. Utterberg and DSU have agreed during the term of the agreement not to compete with the Company during the term of the Consulting Agreement in the field defined in the Consulting Agreement and not to encourage or solicit any of our employees, customers or suppliers to alter their relationship with the Company. The Consulting Agreement further provides that (a) Mr. Utterberg and DSU assign to the Company certain inventions and proprietary rights received by him/it during the term of the agreement and (b) the Company grants Mr. Utterberg and DSU an exclusive, worldwide, perpetual, royalty-free irrevocable, sublicensable, fully paid license under such assigned inventions and proprietary rights for any purpose outside the inventing field, as defined in the Consulting Agreement. Under the terms of the Consulting Agreement, Mr. Utterberg and DSU will receive an aggregate of $0.2 million per year, plus expenses, in full consideration for the services and other obligations provided for under the terms of the Consulting Agreement. The Consulting Agreement also requires Mr. Utterberg and the Company to indemnify each other in the event of certain breaches and failures under the agreement and requires that any such indemnification liability be satisfied with shares of common stock, valued at the time of payment. However, the Company will not be required to issue shares for indemnification purposes that in the aggregate would exceed 20% of the then outstanding shares of our common stock without first obtaining stockholder approval, and any such shares will not be registered under the Securities Act of 1933, as amended. The Company paid Mr. Utterberg and DSU $50,000 and $150,000 for consulting services rendered under this agreement during the three and nine months ended September 30, 2008, respectively.

Finally, in connection with the Medisystems Acquisition, the Company agreed that if Mr. Utterberg is no longer a director of the Company, the Company’s Board of Directors will nominate for election to the Company’s Board of Directors any director nominee proposed by Mr. Utterberg, subject to certain conditions.

On May 22, 2008, the Company entered into Securities Purchase Agreement relating to a private placement of shares of its common stock and warrants to purchase shares of its common stock. The private placement took place in two closings, on May 28, 2008 and August 1, 2008, and raised $25.0 million and $18.0 million, respectively, in gross proceeds. Participants in the private placement consist of unaffiliated and affiliated accredited institutional investors. One of these investors, the Sprout Group, is affiliated with one of the Company’s Board members, Dr. Philippe O. Chambon. The Sprout Group purchased 1.0 million shares and warrants to purchase 0.2 million shares of the Company’s common stock at a price similar to that of unaffiliated investors. Under applicable rules of the NASDAQ Global Market, the second closing of the private placement, which included all shares issued to the Sprout Group and other affiliated accredited institutional investors, was subject to stockholder approval, which was obtained at a special meeting on July 31, 2008.

9. Fair Value Measurements

Effective January 1, 2008, the Company adopted the provisions of SFAS No. 157,Fair Value Measurement, or SFAS 157, for financial assets and liabilities. The Company will adopt the provisions of SFAS 157 for non-financial assets and liabilities that are measured or recognized at fair value on a non-recurring basis on January 1, 2009, in accordance with the partial deferral of this standard by FASB. The Company is currently evaluating the effects the provisions of SFAS 157 will have on non-financial assets and liabilities that are measured or recognized at fair value on a non-recurring basis.

SFAS 157 defines fair value, establishes a framework for measuring fair value under accounting principles generally accepted in the United States of America, and enhances disclosures about fair value measurements. Fair value is defined under SFAS 157 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous

market for the asset or liability in an orderly transaction between market participants on the measurement date. The adoption of SFAS 157 had no impact on previously reported results as all of the provisions were adopted prospectively.

SFAS 157 establishes a fair value hierarchy that prioritizes the inputs in the valuation techniques used to measure fair value into three broad Levels (Level 1, 2, and 3) as follows:


Level 1:		Quoted prices for identical instruments in active markets;

Level 2:		Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations whose inputs are observable or whose significant value drivers are observable; and

Level 3:		Instruments whose significant value drivers are unobservable.

The Company holds cash equivalents and financial instruments that are carried at fair value. The derivative instrument and warrant liability are valued using pricing models which utilize observable inputs. Nonperformance risk of counter-parties is considered in determining the fair value of derivative instruments in an asset position, while the impact of the Company’s own credit standing is considered in determining the fair value of obligations.

Financial assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands):


	September 30, 2008
	Level 1		Level 2		Level 3		Balance
Assets
Money market funds	$	17,727	$	—		—	$	17,727
Liabilities
Warrant liability¹		—		4,143		—		4,143


1		Relates to warrants to purchase shares of the Company’s common stock that were issued on May 28, 2008 and August 1, 2008.

The Company also adopted the provisions of SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities, or SFAS 159, effective January 1, 2008. SFAS 159 allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. The Company has opted not to apply the fair value option to any financial assets or liabilities in the three and nine months ended September 30, 2008.

9. Commitments and Contingencies

The Company enters into arrangements to purchase inventory requiring minimum purchase commitments in the ordinary course of business.

On January 6, 2008, the Company through its wholly-owned subsidiary, Medisystems Corporation, entered into a needle purchase agreement, which is referred to as the Needle Agreement, with DaVita, pursuant to which DaVita has agreed to purchase the majority of its safety needle requirements from Medisystems for five years, subject to certain terms and conditions. The term of the Needle Agreement expires on January 5, 2013. Either party may terminate the Needle Agreement upon a substantial breach of the terms thereof that remains uncured, or upon the insolvency of the other party. DaVita may also terminate the Needle Agreement (a) upon our continued failure to supply safety needles, or (b) if the Company delivers defective safety needles to DaVita for a continued period of time. DaVita has the right to reduce or eliminate its purchase requirements under the Needle Agreement following the introduction of a materially improved product (as defined in the Needle Agreement) from a third party. If DaVita exercises this right, Medisystems may terminate the Needle Agreement. The Needle Agreement provides for liquidated damages in the event DaVita fails to satisfy its purchase requirements or the Company fails to meet its supply obligations to DaVita.

As of October 1, 2007, in connection with the Medisystems Acquisition, the Company, through its wholly-owned subsidiary, Medisystems Corporation, assumed a supply and distribution agreement with Kawasumi Laboratories, Inc., a Japanese contract manufacturer. This agreement covers blood tubing sets and needle sets for the In-Center segment, and has certain minimum purchase commitments. On May 6, 2008, the Company through its wholly-owned subsidiary, Medisystems Corporation, entered into a new supply and distribution agreement with Kawasumi Laboratories, Inc. covering only blood tubing sets. Pursuant to the terms of the agreement, Kawasumi has agreed to continue to manufacture and supply blood tubing sets to the Company through January 31, 2010. In exchange for Kawasumi’s commitment to supply blood tubing sets, and Kawasumi’s agreement not to sell blood tubing sets to any other entity in the United States, the Company has agreed to purchase certain minimum quantities of blood tubing sets. This agreement amends, but does not replace, the prior supply and distribution agreement entered into between Medisystems Corporation and Kawasumi. The prior agreement originally covered the supply of needles as well as blood tubing sets. The new agreement supersedes the prior agreement with respect to the supply of blood tubing sets while the prior agreement continues to be in effect with respect to needles supplied by Kawasumi. Kawasumi’s obligation under the prior agreement to supply needles expires in February 2011. Both agreements may be terminated by either party upon material breach of the terms thereof that remain uncured, or upon the insolvency of the other party.

On March 1, 2007, the Company entered into a long-term agreement with the Entrada Group, or Entrada, to establish manufacturing and service operations in Mexico, initially for its cycler and PureFlow SL disposables and later for its PureFlow SL hardware. The agreement obligates Entrada to provide the Company with manufacturing space, support services and a labor force through 2012. Subject to certain exceptions, the Company is obligated for facility fees through the term of the agreement which approximate $0.2 million annually. The agreement may be terminated by either party upon material breach, generally following a 30-day cure period, or upon the insolvency of the other party.

In January 2007, the Company entered into a long-term supply agreement with Membrana, pursuant to which Membrana has agreed to supply, on an exclusive basis, capillary membranes for use in the filters used with the System One for ten years. In exchange for Membrana’s agreement to pricing reductions based on volumes ordered, the Company has agreed to purchase a base amount of membranes per year from Membrana. The agreement may be terminated by either party upon a material breach, generally following a 60-day cure period, or upon the insolvency of the other party.

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

Special Note Regarding Forward Looking Statements

The following discussion should be read with our unaudited condensed consolidated financial statements and notes included in Part I, Item 1 of this Quarterly Report for the three months and nine months ended September 30, 2008 and 2007, as well as the audited financial statements and notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations for the fiscal year ended December 31, 2007, included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”). This Quarterly Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements regarding future events and our future results are based on current expectations, estimates, forecasts and projections and the beliefs and assumptions of our management including, without limitation, our expectations regarding our results of operations, revenues, cost of revenues, distribution expenses, sales and marketing expenses, general and administrative expenses, research and development expenses, the impact of the acquisition of Medisystems Corporation, our liquidity and capital resources, and the sufficiency of our cash for future operations. Words such as “expect,” “anticipate,” “target,” “project,” “believe,” “goals,” “estimate,” “potential,” “predict,” “may,” “will,” “might,” “could,” “intend,” variations of these terms or the negative of those terms and similar expressions are intended to identify these forward-looking statements, although not all forward-looking statements contain these identifying words. Readers are cautioned that these forward-looking statements are predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements.

Among the important factors that could cause actual results to differ materially from those indicated by our forward-looking statements are those discussed under the heading “Risk Factors” in Item 1A of Part II. We undertake no obligation to revise or update publicly any forward-looking statement for any reason. Readers should carefully review the factors described under the heading “Risk Factors” in Item 1A of Part II of this Quarterly Report and in “Managements Discussion and Analysis of Financial Condition and Results of Operations”, as well as in other documents filed by us with the SEC, as they may be amended from time to time, including our Annual Report on Form 10-K and Quarterly Reports on Form 10-Q.

Overview

We are a medical device company that develops, manufactures and markets innovative systems for the treatment of ESRD, acute kidney failure and fluid overload. Our primary product, the NxStage System One, is a small, portable, easy-to-use hemodialysis system designed to provide physicians and patients improved flexibility in how hemodialysis therapy is prescribed and delivered. In addition to the System One, we also sell needles and blood tubing sets primarily to dialysis clinics for the treatment of ESRD, which we refer to as the In-Center segment. The In-Center product lines were obtained in connection with our acquisition of Medisystems, the MDS Entities, referred to as the Medisystems Entities. As a result of this acquisition, during the quarter ended March 31, 2008, we began operating in two segments. Although the revenues derived from our In-Center products are a large percentage of our current revenues, we believe our largest future product market opportunity is for our System One used in the home hemodialysis market, or home market, for the treatment of ESRD, which we previously referred to as the chronic care market.

We distribute our products in two segments: the System One segment, which consists of the home and critical care markets, and the In-Center segment. We define the home market as the market devoted to the treatment of ESRD patients in the home, the critical care market as the market devoted to the treatment of hospital-based patients with acute kidney failure or fluid overload, and the In-Center segment as our activities devoted to in-center hemodialysis, and apheresis. Within the System One segment, we offer a similar technology platform of the System One for the home and critical care markets with different features. The FDA has cleared the System One for hemodialysis, hemofiltration and ultrafiltration. We offer primarily needles and blood tubing sets in the In-Center segment. Our products are predominantly used by our customers to treat patients suffering from ESRD or acute kidney failure and we have marketing and sales efforts dedicated to each market, although nearly all sales in the In-Center segment are made through distributors.

We received clearance from the FDA in July 2003 to market the System One for treatment of renal failure and fluid overload using hemodialysis as well as hemofiltration and ultrafiltration. In the first quarter of 2003, we initiated sales of the System One in the critical care market to hospitals and medical centers in the United States. In late 2003, we initiated sales of the System One for the treatment of patients with ESRD. At the time of these early marketing efforts, our System One was cleared by the FDA under a

general indication statement, allowing physicians to prescribe the System One for hemofiltration, hemodialysis and/or ultrafiltration at the location, time and frequency they considered in the best interests of their patients. Our original indication did not include a specific home clearance, and we were not able to promote the System One for home use at that time. The FDA cleared the System One in June 2005 for hemodialysis in the home. We are presently pursuing a nocturnal indication for the System One under an FDA-approved investigational device exemption, or IDE, study started in the first quarter of 2008.

Our business expanded significantly in late 2007 in connection with the acquisition of Medisystems Corporation and certain affiliated entities, collectively the MDS Entities. With that acquisition, we acquired our needle and blood tubing set product lines for use predominantly in hemodialysis performed in-center as well as apheresis. The In-Center segment is significantly more mature than our System One segment. Our MDS Entities have been selling products to dialysis centers for the treatment of ESRD since 1981, and they have achieved leading positions in the United States market for both blood tubing sets and needles. Our blood tubing set products include the ReadySet High Performance Blood Tubing set and the Streamline blood tubing sets. ReadySet has been on the market since 1993. Streamline is our next generation blood tubing product designed to provide improved patient outcomes and lower costs to dialysis clinics. This product is early in its market launch and adoption has been limited to date. Our needle product line includes AV fistula needle sets incorporating safety features including PointGuard Anti-Stick Needle Protectors and MasterGuard technology and ButtonHole needle sets. Our AV Fistula Needle Sets with MasterGuard Anti-Stick Needle Protector were introduced in 1995 and our ButtonHole needle sets were introduced in 2002.

Our customers receive reimbursement for the dialysis treatments provided with our products from Medicare and private insurers. Medicare provides comprehensive and well-established reimbursement in the United States for ESRD. Reimbursement claims for home and in-center dialysis therapy using the System One or our blood tubing sets and needles are typically submitted by the dialysis clinic or hospital to Medicare and other third-party payors using established billing codes for dialysis treatment or, in the critical care setting, based on the patient’s primary diagnosis. Medicare presently limits reimbursement for chronic hemodialysis to three treatments per week, absent a finding of medical justification, which determination must be made on a case-by-case basis, based on documentation provided by our customers. Because most of our System One home dialysis patients are treated more than three times a week and receive primary coverage from Medicare, expanding Medicare reimbursement over time to predictably cover more frequent therapy, with less administrative burden for our customers, may be critical to our ability to significantly expand the market penetration of the System One in the home market and to our revenue growth in the future.

The manufacture of our products is accomplished through a complementary combination of outsourcing and internal production. Specifically, we manufacture our System One Cycler and some PureFlow SL hardware, and assemble, package and label our PureFlow SL disposables within our Fresnillo, Mexico facility. We manufacture components used in our System One cartridge assembly, and assemble the System One disposable cartridge and some blood tubing sets, Medics and transducer protectors in Tijuana, Mexico. We manufacture our dialyzers in Rosdorf, Germany. We outsource the manufacture of premixed dialysate, needles, some blood tubing sets and some PureFlow SL hardware.

In our System One segment, we market the System One in the home and critical care markets through a direct sales force in the United States primarily to dialysis clinics and hospitals. In our In-Center segment, we market our blood tubing and needle products primarily through distributors, although we also have a small dedicated sales force for that business. At present, we believe we have an appropriately sized sales force, although this may change as market conditions warrant.

The following table sets forth the amount and percentage of revenues derived from each segment for the periods indicated (in thousands, except percentages):


	Three Months Ended								Nine Months Ended
	September 30,								September 30,
	2008				2007				2008				2007
System One segment
Home	$	12,412	41	%	$	8,318	72	%	$	34,807	37	%	$	20,498	68	%
Critical Care		4,401	14	%		3,307	28	%		13,107	14	%		9,532	32	%

Total System One segment		16,813	55	%		11,625	100	%		47,914	51	%		30,030	100	%

In-Center segment		13,653	45	%		—	0	%		45,173	49	%		—	0	%


Total	$	30,466	100	%	$	11,625	100	%	$	93,087	100	%	$	30,030	100	%

We derive our In-Center segment revenues through the business we acquired in connection with our Medisystems Acquisition. This acquisition was not completed until October 1, 2007, and therefore, we did not realize In-Center segment revenues until the fourth quarter of 2007.

Since inception, we have incurred losses every quarter and at September 30, 2008, we had an accumulated deficit of approximately $223.5 million. We expect our operating expenses to continue to increase as we grow our business. We only recently achieved positive gross margins for our products, in aggregate, and we cannot provide assurance that our gross margins will improve or, if they do improve, the rate at which they will improve. We cannot provide assurance that we will achieve profitability, when we will become profitable, the sustainability of profitability, should it occur, or the extent to which we will be profitable. Our ability to become

profitable is dependent principally upon implementing design and process improvements to lower the costs of manufacturing our products, accessing lower labor cost markets for the manufacture of our products, growing revenue, increasing reliability of our products, improving our field equipment utilization, achieving efficiencies in manufacturing and supply chain overhead costs, achieving efficient distribution of our products, achieving a sufficient scale of operations and obtaining better purchasing terms and prices.

We have experienced negative operating margins and cash flows from operations and expect to continue to incur net losses in the foreseeable future based on our projections. Unless we are successful in restructuring our payment schedule, in February 2009, we will need to begin repaying the principal of the debt we borrowed under our GE credit facility. As of September 30, 2008, we had borrowed $30.0 million under this facility. We believe we have the required resources to fund our projected operating requirements, at least through 2009. In addition, based on current projections, we believe that we have the required resources to fund operating requirements beyond 2009 provided that we restructure the repayment schedule on our current GE credit facility. Future capital requirements will depend on many factors, including the availability of credit, rate of revenue growth, continued progress on improving gross margins, the expansion of selling and marketing and research and development activities, the timing and extent of expansion into new geographies or territories, the timing of new product introductions and enhancement to existing products, the continuing market acceptance of products, and potential investments in, or acquisitions, of complementary businesses, services or technologies.

2008 Recent Developments

GE Credit Facility

On March 25, 2008 we borrowed the remaining $5.0 million of the $30.0 million term loan available to us under our GE credit facility. Borrowings under the term loan bear interest equal to LIBOR plus 6% per annum, fixed on March 25, 2008 for our recent $5.0 million borrowing (at a rate of 8.61% per year). In February 2009, we will need to begin repaying the principal of the debt we borrowed pursuant to the agreement.

Equity Financing

On May 22, 2008 we entered into a $43.0 million private placement. The private placement closed in two tranches. The first tranche consisting of 5.6 million shares of common stock and warrants to purchase 1.1 million shares of the Company’s common stock was issued and sold on May 28, 2008 to funds managed or advised by OrbiMed Advisors LLC for aggregate gross proceeds of $25.0 million. The second tranche consisting of 4.0 million shares and warrants to purchase 0.8 million shares of the Company’s common stock was issued on August 1, 2008 to existing NxStage institutional investors for aggregate gross proceeds of $18.0 million. The proceeds from both tranches, net of transaction costs, were approximately $42.6 million. We were required to register the common stock and the common stock issuable upon exercise of the warrants with the Securities and Exchange Commission, which we did on August 8, 2008. If the holders of the shares or the accompanying warrant shares are unable to sell such shares or warrant shares under the registration statement for more than 30 days in any 365 day period after the effectiveness of the registration statement, we may be obligated to pay damages equal to up to 1% of the share purchase price per month that the registration statement is not effective or the investors are unable to sell their shares.

Statement of Operations Components

Revenues

In the System One segment we derive our revenues from the sale and rental of equipment and the sale of disposable products in the home and critical care markets. In the critical care market, we generally sell the System One and related disposables to hospital customers. In the home market, customers generally rent or purchase the System One equipment, including cycler and PureFlow SL, and then purchase the related disposable products based on a specific patient prescription. In the In-Center segment, the majority of revenues are derived from supply and distribution contracts with distributors.

We generally recognize revenues when a product has been delivered to our customer or, in the home market, for those customers that rent the System One, we recognize revenues on a monthly basis in accordance with customer contracts under which we supply the use of hardware and disposables needed to perform dialysis therapy sessions during a month. For customers that purchase the System One in the home market, we recognize revenue from the equipment sale ratably over the expected service obligation period, while disposable product revenue is recognized upon delivery.

Our rental contracts with dialysis centers for ESRD home dialysis patients generally include terms providing for the sale of disposable products to accommodate up to 26 treatments per month per patient and the purchase or monthly rental of System One cyclers and, in some instances, our PureFlow SL hardware. These contracts typically have a term of one year, and are automatically renewed on a month-to-month basis thereafter, subject to a 30-day termination notice. Under these contracts, if home hemodialysis is prescribed, supplies are shipped directly to patient homes and paid for by the treating dialysis clinic. We also include vacation delivery terms, providing for the free shipment of products to a designated vacation destination. We derive an insignificant amount of revenues from the sale of ancillary products, such as extra lengths of tubing. Over time, as more home patients are treated with the System One and more systems are placed in patient homes that provide for the purchase or rental of the machine and the purchase of the related disposables, we expect this recurring revenue stream to continue to grow.

In early 2007, we entered into long-term home market contracts for the System One with three larger dialysis chains, including DaVita, which was our largest customer in 2007. Each of these agreements has a term of at least three years, and may be cancelled

upon a material breach, subject to certain curing rights. These contracts provide the option to purchase as well as rent the System One equipment, and, in the case of the DaVita contract, DaVita has agreed to purchase rather than rent a significant percentage of its future System One equipment needs. In the first quarter of 2007, two of these dialysis chain customers, one of which was DaVita, elected to purchase, rather than rent, a significant percentage of their System One equipment currently in use. We expect, at least in the near term, that the majority of our customers will continue to rent the System One in the home market. As of September 30, 2008, we had deferred approximately $27.9 million of revenues related to the sale of equipment in the home market.

Our critical care market revenues are less concentrated. At September 30, 2008, the System One was used in critical care applications in several hospitals, none of which accounted for more than 10% of our critical care revenues. Our critical care contracts with hospitals generally include terms providing for the sale of our System One hardware and disposables, although we also provide a hardware rental option. These contracts typically have a term of one year. As our business matures, we are starting to derive a small amount of revenue from the sale of one and two year service contracts following the expiration of our standard one-year warranty period for System One hardware. Similar to our home business, as more System One equipment is placed within hospitals, we expect to derive a growing recurring revenue stream from the sale of disposable cartridges for use with our placed System One equipment as well as, to a much lesser degree, from the sale of service contracts.

Our In-Center segment revenues are highly concentrated in several significant purchasers. Revenues from Henry Schein, Inc., or Schein, our primary distributor, represented approximately 82% and 80% of our In-Center segment revenues for the three months and nine months ended September 30, 2008, respectively. Revenues from our two other significant distributors over the same periods were 18% and 17%, respectively, of our In-Center segment revenues. Sales to DaVita, through Schein, represent a significant percentage of these revenues. DaVita has contractual purchase commitments under two agreements with us, one for needles and one for blood tubing sets. DaVita’s purchase obligations with respect to needles expire in January 2013. Its purchase obligations with respect to blood tubing sets originally expired in September 2008. In September 2008, we signed an amendment to the DaVita agreement which extended the term with respect to blood tubing sets for one-year through September 2009.

Our distribution contracts for our In-Center segment contain minimum volume commitments with negotiated pricing triggers at different volume tiers. Each agreement may be cancelled upon a material breach, subject to certain curing rights, and in many instances minimum volume commitments can be reduced or eliminated upon certain events. In addition to contractually determined volume discounts, we offer rebates based on sales to specific end customers and discount incentives for early payment. Our sales revenues are presented net of these rebates, incentives, discounts and returns.

Our agreement with Schein, our primary distributor for the In-Center segment, will expire in July 2009 and our agreements with the other primary two distributors for the In-Center segment are scheduled to expire in July 2011 and July 2009, respectively. We have no assurance that we will be able to negotiate an extension of any of these agreements.

Cost of Revenues

Cost of revenues consists primarily of direct product costs, including material and labor required to manufacture our products, service of System One equipment that we rent and sell to customers and production overhead. It also includes the cost of inspecting, servicing and repairing System One equipment prior to sale or during the warranty period and stock-based compensation. The cost of our products depends on several factors, including the efficiency of our manufacturing operations, the cost at which we can obtain labor and products from third-party suppliers, product reliability and related servicing costs and the design of our products.

We expect the cost of revenues as a percentage of revenues to decline over time for four general reasons. First, we expect to introduce several process and product design changes that have inherently lower cost than our current products. Second, although substantially complete, we plan to continue the transition of some service capabilities pertaining to certain products, including the System One cycle and PureFlow SL, to lower labor cost markets. Third, we expect to continue to improve product reliability, which would reduce service and distribution costs. Finally, we anticipate that increased sales volume and realization of economies of scale will lead to better purchasing terms and prices and broader options and efficiencies in manufacturing and supply chain overhead costs, achieving efficient distribution process. We cannot, however, guarantee that our expectations will be achieved with respect to our cost reduction plans.

Operating Expenses

Selling and Marketing.Selling and marketing expenses consist primarily of salary, benefits and stock-based compensation for sales and marketing personnel, travel, promotional and marketing materials and other expenses associated with providing clinical training to our customers. Included in selling and marketing are the costs of clinical educators, usually nurses, we employ to teach our customers about our products and prepare our customers to instruct their patients in the operation of our products. We anticipate that selling and marketing expenses will continue to increase as we broaden our marketing initiatives to increase public awareness of the System One in the home market and other products, particularly Streamline, in the in-center market, and as we add additional sales support and marketing personnel.

Research and Development.Research and development expenses consist primarily of salary, benefits and stock-based compensation for research and development personnel, supplies, materials and expenses associated with product design and development, clinical studies, regulatory submissions, reporting and compliance and expenses incurred for outside consultants or firms who furnish services related to these activities. We expect research and development expenses will increase in the foreseeable future as we continue to improve and enhance our core products and expand our clinical activities.

Distribution.Distribution expenses include the freight cost of delivering our products to our customers or our customers’ patients, depending on the market and the specific agreements with our customers, and salary, benefits and stock-based compensation for distribution personnel. We use common carriers and freight companies to deliver our products and we do not operate our own delivery service. Also included in this category are the expenses of shipping products under warranty from customers back to our service center for repair and the related expense of shipping a replacement product to our customers. We expect that distribution expenses will increase at a lower rate than revenues due to expected efficiencies gained from increased business volume, better pricing obtained from carriers following recent price negotiations, customer adoption of our PureFlow SL hardware, which significantly reduces the weight and quantity of monthly disposable shipments, and improved reliability of System One equipment. We cannot predict the estimated impact, if any, of fuel costs on future distribution costs.

General and Administrative.General and administrative expenses consist primarily of salary, benefits and stock-based compensation for our executive management, legal and finance and accounting staff, fees of outside legal counsel, fees for our annual audit and tax services and general expenses to operate the business, including insurance and other corporate-related expenses. Rent, utilities and depreciation expense are allocated to operating expenses based on personnel and square foot usage. We expect that general and administrative expenses will continue to increase in the near term as we add additional administrative support for our business.

Results of Operations

The following table presents, for the periods indicated, information expressed as a percentage of revenues. This information has been derived from our condensed consolidated statements of operations included elsewhere in this Quarterly Report on Form 10-Q. You should not draw any conclusions about our future results from the results of operations for any period.


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
Revenues		100	%		100	%		100	%		100	%
Cost of revenues		84	%		130	%		86	%		122	%

Gross profit (deficit)		16	%		-30	%		14	%		-22	%


Operating expenses:
Selling and marketing		22	%		46	%		22	%		51	%
Research and development		7	%		13	%		7	%		14	%
Distribution		11	%		30	%		11	%		30	%
General and administrative		16	%		22	%		16	%		26	%

Total operating expenses		56	%		111	%		56	%		121	%

Loss from operations		-40	%		-141	%		-42	%		-143	%


Other income (expense):
Interest income		0	%		5	%		0	%		8	%
Interest expense		-3	%		-1	%		-3	%		-2	%
Change in fair value of financial instruments		-6	%		—			0	%		—
Other income (expense), net		0	%		—			0	%		—

		-9	%		4	%		-3	%		6	%

Provision for income taxes		—			—			—			—


Net loss		-49	%		-137	%		-45	%		-137	%

Comparison of the Three and Nine Months Ended September 30, 2008 and 2007 (in thousands, except percentages)

Revenues

The increase in revenues for both the three and nine months ended September 30, 2008 was attributable to the addition of the In-Center business that was added as part of the Medisystems Acquisition and increased sales and rentals of the System One and related disposables in both the critical care and home markets, primarily as a result of increased patient count as we continue to penetrate the market place.

In the home market, revenue increased $4.1 million, or 49%, and $14.3 million, or 70%, for the three and nine months ended September 30, 2008, versus the prior year comparable periods as a result of an increase in the number of patients using and centers offering the System One.

Critical care market revenue increased $1.1 million, or 33%, and $3.6 million, or 38%, for the three and nine months ended September 30, 2008, versus the prior year comparable periods as a result of an increase in hospitals purchasing and using the System One.

Revenue in the In-Center segment represented $13.7 million and $45.2 million for the three and nine months ended September 30, 2008. We completed the Medisystems Acquisition on October 1, 2007 and do not have comparable results for the In-Center business for the three and nine months ended September 30, 2007.

Cost of Revenues and Gross Profit (Deficit)

Our cost of revenues and gross profit (deficit) for the three and nine months ended September 30, 2008 and 2007 were as follows (in thousands, except percentages):


	Three Months Ended							Nine Months Ended
	September 30,		September 30,		%			September 30,		September 30,		%
	2008		2007		Change			2008		2007		Change
System One segment	$	13,258	$	10,691		24	%	$	38,169	$	29,214		31	%
In-Center segment		9,902		—		100	%		34,020		—		100	%
Unallocated		2,524		4,470		-44	%		7,683		7,375		4	%

Total Cost of Revenue	$	25,684	$	15,161		69	%	$	79,872	$	36,589		118	%

Cost of revenue increased $10.5 million, or 69%, and $43.3 million, or 118%, for the three and nine months ended September 30, 2008, versus the prior year comparable periods. The increase in cost of revenues was attributable primarily to increased sales volume in the home and critical care markets and the addition of the In-Center segment as a result of the Medisystems acquisition. Gross margin as a percentage of revenue increased to 16% and 14% for the three and nine months ended September 30, 2008, versus a loss of 30% and 22% for the prior year comparable periods. The improvement in gross margin percentage is a result of the Medisystems acquisition, manufacturing cost improvements to the System One equipment and disposables and the leveraging of our manufacturing overhead. Additionally, we incurred a one time charge of $2.3 million relating to a voluntary recall of our chronic cartridges during the three-months ended September 30, 2007. We expect cost of revenue will continue to decrease as a percentage of revenue as we continue to introduce manufacturing cost improvements, improve product reliability and leverage manufacturing overhead.

Selling and Marketing

Our selling and marketing expenses for the three and nine months ended September 30, 2008 and 2007 were as follows (in thousands, except percentages):


	Three Months Ended							Nine Months Ended
	September 30,		September 30,		%			September 30,		September 30,		%
	2008		2007		Change			2008		2007		Change
System One segment	$	5,894	$	5,383		9	%	$	18,253	$	15,234		20	%
In-Center segment		945		—		100	%		2,684		—		100	%

Total Selling and marketing	$	6,839	$	5,383		27	%	$	20,937	$	15,234		37	%

Selling and marketing increased $1.5 million, or 27%, and $5.7 million, or 37%, for the three and nine months ended September 30, 2008, versus the prior year comparable periods. The increase in selling and marketing expense was primarily the result of the addition of the In-Center segment as a result of the Medisystems acquisition and an increase in headcount and related salary, benefits, payroll taxes and stock-based compensation for selling and marketing personnel from 2007 to 2008. Total headcount related expenses increased $1.0 million for the three months and $4.2 million for the nine months ended September 30, 2008, versus the prior year comparable periods. In addition, travel expense and consulting increased by $0.4 million and $1.3 million for the three and nine months ending September 30, 2008. We anticipate that selling and marketing expenses will continue to increase in absolute dollars, but decrease as a percentage of revenue in both segments as we broaden our marketing initiatives to increase public awareness of the System One in the home market, and to a lesser degree in the critical care market, and our other products, particularly Streamline, in the In-Center market.

Research and Development

Our research and development expenses for the three and nine months ended September 30, 2008 and 2007 were as follows (in thousands, except percentages):


	Three Months Ended							Nine Months Ended
	September 30,		September 30,		%			September 30,		September 30,		%
	2008		2007		Change			2008		2007		Change
Research and development	$	1,986	$	1,467		35	%	$	6,474	$	4,321		50	%

Research and development increased $0.5 million, or 35%, and $2.2 million, or 50%, for the three and nine months ended September 30, 2008, versus the prior year comparable periods. The increase in research and development expense was primarily the result of an increase in headcount and related salary, benefits, payroll taxes and stock-based compensation for research and development personnel from 2007 to 2008 and increased clinical trials expenses. Total headcount and related expenses increased $0.5 million for the three months and $1.7 million for the nine months ended September 30, 2008, versus the prior year comparable periods. We expect research and development expenses will increase in absolute dollars but decrease as a percentage of sales in the

foreseeable future as we seek to further enhance our System One and related products, and their reliability, and with the increased activity associated with our IDE nocturnal trial and FREEDOM study.

Distribution

Our distribution expenses for the three and nine months ended September 30, 2008 and 2007 were as follows (in thousands, except percentages):


	Three Months Ended							Nine Months Ended
	September 30,		September 30,		%			September 30,		September 30,		%
	2008		2007		Change			2008		2007		Change
System One segment	$	2,943	$	3,532		-17	%	$	9,022	$	8,874		2	%
In-Center segment		529		—		100	%		1,180		—		100	%

Total Distribution	$	3,472	$	3,532		-2	%	$	10,202	$	8,874		15	%

Distribution expense was 11% of revenue for the three and nine months ended September 30, 2008 versus 30% for the prior year comparable periods. The decreased cost of distribution as a percentage of revenue was due to lower cost of distribution for the In-Center segment as well as improved shipping rates, better product reliability resulting in fewer expedited shipments, reduction in cost of shipping bagged fluids as we convert more patients to our PureFlow SL products, and the use of an outsourced logistics provider located in the central part of the continental United States. We expect that distribution expenses as a percentage of sales will continue to decrease due to further distribution efficiencies.

General and Administrative

Our general and administrative expenses for the three and nine months ended September 30, 2008 and 2007 were as follows (in thousands, except percentages):


	September 30,		September 30,		%			September 30,		September 30,		%
	2008		2007		Change			2008		2007		Change
General and administrative	$	4,744	$	2,649		79	%	$	14,443	$	7,842		84	%

General and administrative expenses for the three months ended September 30, 2008 increased $2.1 million or 79%, versus the prior year comparable period. The increase was primarily due to $0.7 million of amortization of intangible assets acquired in the Medisystems Acquisition and an increase in headcount and associated infrastructure costs of $0.5 million, professional services including legal, tax and audit fees of $0.5 million, and the inclusion of MDS Entities expenses.

General and administrative expenses for the nine months ended September 30, 2008 increased $6.6 million or 84%, versus the prior year comparable period. The increase was primarily due to $2.1 million of amortization of intangible assets acquired in the Medisystems Acquisition and an increase in headcount and associated infrastructure costs of $1.9 million, professional services including tax and audit fees of $1.0 million, and allowance for doubtful accounts of $0.4 million, and the inclusion of MDS Entities expenses.

General and administrative expenses as a percentage of revenue decreased to 16% for the three and nine months ended September 30, 2008 versus 22% and 26% for the three and nine months ended September 30, 2007, respectively. The decrease was due to our continued initiative to leverage our overhead structure.

Other Income and Expense

Interest income decreased $0.4 million, or 75%, and $1.9 million, or 81%, for the three and nine months ended September 30, 2008, versus the prior year comparable periods due to decreased cash and investments which were used to fund operations. Interest income is derived primarily from investments in money market funds.

Interest expense increased $0.9 million and $2.4 million for the three and nine months ended September 30, 2008, versus the prior year comparable periods due to increased in outstanding borrowings. Interest expense is derived primarily from borrowings under our credit facility with GE that we entered into in November 2007.

The change in fair value of the warrants issued on May 22, 2008 and August 1, 2008 in connection with the private placement resulted in the recognition of a $0.2 million loss and a $1.0 million gain for the three and nine months ended September 30, 2008 and the change in fair value of the obligation entered into on May 22, 2008 in connection with the second tranche resulted in the recognition of a $1.6 million and $0.7 million loss for the three and nine months ended September 30, 2008. The obligation was settled on August 1, 2008.

Other income of $0.1 million and expense $0.2 million for the three and nine months ended September 30, 2008 is derived primarily by foreign currency losses due to the unfavorable change of the US Dollar to the Euro.

Provision for Income Taxes

The provision for income taxes of $0.1 million and $0.2 million for the three and nine months ended September 30, 2008 relates to the profitable operations of certain of our foreign entities.

Liquidity and Capital Resources

We have operated at a loss since our inception in 1998. As of September 30, 2008, our accumulated deficit was $223.5 million and we had cash and cash equivalents of approximately $32.9 million.

On May 22, 2008, we entered into a $43 million private placement agreement to sell an aggregate of 9.6 million shares of our common stock at a price of $4.50 and warrants to purchase 1.9 million shares of our common stock at an exercise price of $5.50 per share. The first tranche of the financing, consisting of approximately 5.6 million newly-issued and unregistered shares of common stock and warrants to purchase 1.1 million shares of our common stock, was sold on May 28, 2008 for aggregate gross proceeds of $25.0 million to certain accredited investors managed by a single advisor, OrbiMed Advisors LLC. The second tranche, consisting of 4.0 million shares and warrants to purchase 0.8 million shares of common stock, was sold on August 1, 2008 for aggregate gross proceeds of $18 million to existing NxStage institutional investors. The proceeds from both tranches of the financing, net of transaction costs were approximately $42.6 million.

On November 21, 2007, we obtained a $50.0 million credit and security agreement with a term of 42 months from a group of lenders led by Merrill Lynch Capital, a division of Merrill Lynch Business Services, Inc., which was acquired by GE. The credit facility is secured by nearly all our assets, other than intellectual property, and consists of a $30.0 million term loan and a $20.0 million revolving credit facility. We borrowed $25.0 million under the GE term loan in November 2007, and borrowed the remaining $5.0 million in March 2008. We used $4.9 million of the proceeds from the term loan to repay all amounts owed under a term loan dated May 15, 2006 with Silicon Valley Bank. Borrowings under the term loan bear interest equal to LIBOR plus 6% per annum, fixed on November 21, 2007 for our first borrowing (at a rate of 10.77% per year) and fixed on March 25, 2008 for our second borrowing (at a rate of 8.61% per year). Interest on the term loan must be paid on a monthly basis. Beginning on February 1, 2009, we must repay principal under the term loan in 29 equal monthly installments. We will also be required to pay a maturity premium of $0.9 million at the time of loan payoff. We are accruing the maturity premium as additional interest over the 42-month term. Our borrowing capacity under the revolving credit facility is subject to satisfaction of certain conditions and calculations of the borrowing amount. There is no guarantee that we will be able to borrow the full amount, or any funds, under the revolving credit facility. Any borrowings under the revolving credit facility will bear interest at LIBOR plus 4.25% per annum. There is an unused line fee of 0.75% per annum and descending deferred revolving credit facility commitment fees, which are charged in the event the revolving credit facility is terminated prior to May 21, 2011 of 4% in year one, 2% in year two, and 1% thereafter. As of September 30, 2008, we have borrowed $30.0 million under the GE term loan and have no borrowings outstanding under the revolving credit facility.

The credit facility includes covenants that (a) require us to achieve certain minimum net revenue and certain minimum EBITDA targets relating to the acquired MDS Entities, (b) place limitations on our and our subsidiaries’ ability to incur debt, (c) place limitations on our and our subsidiaries ability to grant or incur liens, carry out mergers, and make investments and acquisitions, and (d) place limitations on our and our subsidiaries’ ability to pay dividends, make other restricted payments, enter into transactions with affiliates, and amend certain contracts. The credit agreement contains customary events of default, including nonpayment, misrepresentation, breach of covenants, material adverse effects, and bankruptcy. In the event we fail to satisfy our covenants, or otherwise go into default, GE has a number of remedies, including sale of our assets, control of our cash and cash equivalents and acceleration of all outstanding indebtedness. Any of these remedies would likely have a material adverse effect on our business. The Company is in compliance with all covenants as of September 30, 2008.

On February 7, 2007, we entered into a National Service Provider Agreement with DaVita, our largest customer. Pursuant to the terms of the agreement, we granted to DaVita certain market rights for the NxStage System One and related supplies for home hemodialysis therapy. Under the agreement, DaVita committed to purchase all of its existing System One equipment then being rented from NxStage (for a purchase price of approximately $5 million) and to buy a significant percentage of its future System One equipment needs. In connection with the National Service Provider Agreement, on February 7, 2007, we issued and sold to DaVita 2.0 million shares of our common stock at a purchase price of $10.00 per share, for an aggregate purchase price of $20.0 million.

We maintain postemployment benefit plans for employees in certain foreign subsidiaries. The plans provide lump sum benefits, payable based on statutory regulations for voluntary or involuntary termination. Where required, we obtain an annual actuarial valuation of the benefit plans. We have recorded a liability of $1.5 million as other long-term liabilities at September 30, 2008 for costs associated with these plans. The expense record in connection with these plans was not significant for the nine months ended September 30, 2008 or 2007.

The following table sets forth the components of our cash flows for the periods indicated (in thousands):


	Nine Months Ended
	September 30,
	2008			2007
Net cash used in operating activities	$	(46,953	)	$	(44,043	)
Net cash (used in) provided by investing activities		(686	)		6,973
Net cash provided by financing activities		47,757			19,412
Effect of exchange rate changes on cash		(484	)		82

Net cash flow	$	(366	)	$	(17,576	)

Net Cash Used in Operating Activities.For each of the periods above, net cash used in operating activities was attributable primarily to net losses after adjustment for non-cash charges, such as depreciation, amortization and stock-based compensation expense. Significant uses of cash from operations for each of the periods above include increases in accounts receivable and increased inventory purchases of System One and PureFlow SL hardware as we began closing out our outside manufacturing contracts. Non-cash transfers from inventory to field equipment and deferred costs for the placement of rental units with our customers represented $19.3 million and $22.8 million, respectively, during the nine months ended September 30, 2008 and 2007, respectively.

Net Cash (Used in) Provided by Investing Activities.Net cash used in investing activities reflected purchases of property and equipment of $2.6 million and $2.4 million for the nine months ended September 30, 2008 and 2007, respectively, primarily for research and development, information technology, manufacturing operations and capital improvements to our facilities. Net maturities of short-term investments were $1.1 million and $11.3 million for the nine months ended September 30, 2008 and 2007, respectively. This activity varies from period to period based upon our cash requirements and investments. Other assets decreased $0.8 million during the nine months ended September 30, 2008 compared to an increase of $2.0 million during the nine months ended September 30, 2007.

Net Cash Provided by Financing Activities.Net cash provided by financing activities during the nine months ended September 30, 2008 included $5.0 million of additional borrowings under our term GE credit facility and $42.6 million net proceeds from the sale of 9.6 million shares of our common stock and warrants to purchase 1.9 million shares of our common stock. Net cash provided by financing activities during the nine months ended September 30, 2007 included $19.9 million of net proceeds received from the sale of 2.0 million shares of common stock to DaVita and $1.6 million of proceeds from the exercise of stock options, offset by debt payments of $2.1 million.

We have experienced negative operating margins and cash flows from operations and we expect to continue to incur net losses in the foreseeable future. We believe that we have the required resources to fund current operating requirements at least through 2009. In addition, we believe, based on current projections, that we have the required resources to fund operating requirements beyond 2009 provided that we restructure the repayment schedule on our current GE credit facility. Future capital requirements will depend on many factors, including the availability of credit, rate of revenue growth, continued progress on improving gross margins, the expansion of selling and marketing activities and research and development activities, the timing and extent of expansion into new geographies or territories, the timing of new product introductions and enhancement to existing products, the continuing market acceptance of products, and potential investments in, or acquisitions of complementary businesses, services or technologies.

Our contractual commitments have not materially changed since December 31, 2007.

Summary of Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of these consolidated financial statements requires us to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. These items are regularly monitored and analyzed by management for changes in facts and circumstances, and material changes in these estimates could occur in the future. Changes in estimates are recorded in the period in which they become known. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ substantially from our estimates.

A summary of those accounting policies and estimates that we believe are most critical to fully understanding and evaluating our financial results is described in Item 7 in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007 and updated, as necessary, below. This summary should be read in conjunction with our condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q.

Revenue Recognition

We recognize revenues from product sales and services when earned in accordance with Staff Accounting Bulletin No. 104 or SAB, No. 104,Revenue Recognition, and Emerging Issues Task Force Issue,Revenue Arrangements with Multiple Deliverables, or EITF 00-21.Revenues are recognized when: (a) there is persuasive evidence of an arrangement, (b) the product has been shipped or services and supplies have been provided to the customer, (c) the sales price is fixed or determinable and (d) collection is reasonably assured.

System One Segment

Prior to 2007, we derived revenue in the home market from short-term rental arrangements with our customers as our principal business model. These rental arrangements, which combine the use of the System One with a specified number of disposable products supplied to customers for a fixed amount per month, are recognized on a monthly basis in accordance with agreed upon contract terms and pursuant to binding customer purchase orders and fixed payment terms. Rental arrangements continue to represent the majority of the arrangements we have with our customers in the home market. Equipment utilized under the rental arrangements is referred to as Field Equipment.

Beginning in 2007, we entered into long-term customer contracts to sell System One and PureFlow SL equipment along with the right to purchase disposable products and service on a monthly basis. Some of these agreements include other terms such as development efforts, training, market collaborations, limited market exclusivity and volume discounts. The equipment and related items provided to our customers in these arrangements are considered multiple-element sales arrangements pursuant to EITF 00-21. When a sales arrangement involves multiple elements, the deliverables included in the arrangement are evaluated to determine whether they represent separate units of accounting. We have determined that we cannot account for the sale of equipment as a separate unit of accounting. Therefore, fees received upon the completion of delivery of equipment are deferred, and recognized as revenue on a straight-line basis over the expected term of our obligation to supply disposables and service, which is five to seven years. We have deferred both the unrecognized revenue and direct costs relating to the delivered equipment, which costs are being amortized over the same period as the related revenue.

We entered into a national service provider agreement and a stock purchase agreement with DaVita on February 7, 2007. Pursuant to EITF 00-21, we consider these agreements a single arrangement. In connection with the stock purchase agreement, DaVita purchased 2.0 million shares of our common stock for $10.00 per share, which represented a premium of $1.50 per share, or $3.0 million over the current market price on that date. We have recorded the $3.0 million premium as deferred revenue and will recognize this revenue ratably over seven years, consistent with our equipment service obligation to DaVita. During the three months and nine months ended September 30, 2008, we recognized revenue of $0.1 and $0.3 million, respectively, associated with the $3.0 million premium.

In the critical care market, sales are structured as direct product sales or as disposables-based programs in which a customer acquires the equipment through the purchase of a specific quantity of disposables over a specific period of time. We recognize revenues at the later of the time of shipment or, if applicable, delivery in accordance with contract terms. Under a disposables-based program, the customer is granted the right to use the equipment for a period of time, during which the customer commits to purchase a minimum number of disposable cartridges or fluids at a price that includes a premium above the otherwise average selling price of the cartridges or fluids to recover the cost of the equipment and provide for a profit. Upon reaching the contractual minimum purchases, ownership of the equipment transfers to the customer. Revenues under these arrangements are recognized over the term of the arrangement as disposables are delivered. During the reported periods, the majority of our critical care revenues were derived from supply contracts and direct product sales.

Our contracts provide for training, technical support and warranty services to our customers. We recognize training and technical support revenue when the related services are performed. In the case of extended warranty, the revenue is recognized ratably over the warranty period.

In-Center Segment

In the In-Center market, nearly all sales are structured through supply and distribution contracts with distributors. Our distribution contracts for the In-Center market contain minimum volume commitments with negotiated pricing triggers at different volume tiers. Each agreement may be cancelled upon a material breach, subject to certain curing rights, and in many instances minimum volume commitments can be reduced or eliminated upon certain events. In addition to contractually determined volume discounts, we offer rebates based on sales to specific end customers and discount incentives for early payment. Our sales revenues are presented net of these rebates, incentives, discounts and returns.

We recognize rebates to customers in the In-Center market in accordance with EITF 01-09,Accounting for Consideration given by a Vendor to a Customer (Including) Reseller of the Vendors Products.Customer rebates are included as a reduction of sales and trade accounts receivable and are our best estimate of the amount of probable future rebates on current sales.

Related-Party Transactions

On June 4, 2007, we entered into a stock purchase agreement with David S. Utterberg under which we agreed to purchase from Mr. Utterberg the issued and outstanding shares of the MDS Entities. We refer to our acquisition of the MDS Entities as the Medisystems Acquisition. Mr. Utterberg is a director and significant stockholder of NxStage. The Medisystems Acquisition was completed on October 1, 2007 and, as a result, each of the MDS Entities is a direct or indirect wholly-owned subsidiary of NxStage. In addition, as a result of completion of the Medisystems Acquisition, the supply agreement, dated January 2007, with Medisystems Corporation, under which Medisystems Corporation agreed to provide cartridges for use with the System One, was terminated with no resulting gain or loss recognized. In consideration for the Medisystems Acquisition, we issued Mr. Utterberg 6.5 million shares of our common stock, which we refer to as the Acquisition Shares. As a result of the Medisystems Acquisition and the issuance of the Acquisition Shares to Mr. Utterberg, Mr. Utterberg’s aggregate ownership of our outstanding common stock increased to approximately 20%. In addition, we may be required to issue additional shares of our common stock to Mr. Utterberg. Pursuant to the terms of the stock purchase agreement, Mr. Utterberg and we have agreed to indemnify each other in the event of certain breaches or failures, and any such indemnification amounts must be paid in shares of our common stock, valued at the time of payment. However,

we will not be required to issue shares for indemnification purposes that in the aggregate would exceed 20% of the then outstanding shares of our common stock without first obtaining stockholder approval, and any such shares will not be registered under the Securities Act of 1933, as amended. An aggregate of 1.0 million of the Acquisition were placed into escrow to cover potential indemnification claims we may have against Mr. Utterberg. As of November 5, 2008, 0.5 million shares remain in escrow. In connection with the Medisystems Acquisition and as a result of Medisystems Corporation, one of the MDS Entities, becoming a direct wholly-owned subsidiary of ours, we acquired rights under an existing license agreement between Medisystems Corporation and DSU Medical Corporation, or DSU, a Nevada corporation, which is wholly-owned by Mr. Utterberg. We refer to this agreement as the License Agreement. Additionally, as a condition to the parties’ obligations to consummate the Medisystems Acquisition, Mr. Utterberg and DSU entered into a consulting agreement with us dated October 1, 2007, which we refer to as the Consulting Agreement.

Under the License Agreement, Medisystems Corporation received an exclusive, irrevocable, sublicensable, royalty-free, fully paid license to certain DSU patents, or the licensed patents, in exchange for a one-time payment of $2.7 million. The licensed patents fall into two categories, those patents that are used exclusively by the MDS Entities, referred to as the Class A patents, and those patents that are used by the MDS Entities and other companies owned by Mr. Utterberg, referred to as the Class B patents. Pursuant to the terms of the License Agreement, Medisystems Corporation has a license to (1) the Class A patents, to practice in all fields for any purpose and (2) the Class B patents, solely with respect to certain defined products for use in the treatment of extracorporeal fluid treatments and/or renal insufficiency treatments. The License Agreement further provides that the rights of Medisystems Corporation under the agreement are qualified by certain sublicenses previously granted to third parties. We have agreed that Mr. Utterberg retains the right to the royalty income under one of these sublicenses.

Under the Consulting Agreement, Mr. Utterberg and DSU will provide consulting, advisory and related services to us for a period of two years following the consummation of the Medisystems Acquisition. In addition, under the terms of the Consulting Agreement, Mr. Utterberg and DSU have agreed not to compete with NxStage during the term of the Consulting Agreement in the field defined in the Consulting Agreement and not to encourage or solicit any of our employees, customers or suppliers to alter their relationship with us during the term of the agreement. The Consulting Agreement further provides that (1) Mr. Utterberg and DSU assign to us certain inventions and proprietary rights received by him/it during the term of the agreement and (2) we grant Mr. Utterberg and DSU an exclusive, worldwide, perpetual, royalty-free irrevocable, sublicensable, fully paid license under such assigned inventions and proprietary rights for any purpose outside the inventing field, as defined in the Consulting Agreement. Under the terms of the Consulting Agreement, Mr. Utterberg and DSU will receive an aggregate of $200,000 per year during the term of the agreement, plus expenses, in full consideration for the services and other obligations provided for under the terms of the Consulting Agreement. The Consulting Agreement also requires Mr. Utterberg and NxStage to indemnify each other in the event of certain breaches and failures under the agreement and requires that any such indemnification liability be satisfied with shares of our common stock, valued at the time of payment. However, we will not be required to issue shares for indemnification purposes that in the aggregate would exceed 20% of the then outstanding shares of our common stock without first obtaining stockholder approval, and any such shares will not be registered under the Securities Act of 1933, as amended. We paid Mr. Utterberg and DSU $50,000 and $150,000 for consulting services rendered under this agreement during the three and nine months ended September 30, 2008, respectively.

We assumed a $2.8 million liability owed to DSU as a result of the acquisition of the MDS Entities. The amount owed represents consideration owed to DSU by the MDS Entities for the termination of a royalty-bearing sublicense agreement of $0.1 million and the one-time payment for the establishment of the royalty-free license agreement of $2.7 million. We paid $2.0 million of the liability owed during the quarter ended March 31, 2008 and the remaining liability of $0.6 million, net of receivable from DSU for reimbursements of costs related to the acquisition of $0.2 million, during the quarter ended September 30, 2008.

In connection with the Medisystems Acquisition, we also agreed that if Mr. Utterberg is no longer a director of NxStage, our Board of Directors will nominate for election to our Board of Directors any director nominee proposed by Mr. Utterberg, subject to certain conditions.

On May 22, 2008, the Company entered into Securities Purchase Agreement relating to a private placement of shares of its common stock and warrants to purchase shares of its common stock. The private placement took place in two closings, on May 28, 2008 and August 1, 2008, and raised $25.0 million and $18.0 million, respectively, in gross proceeds. Participants in the private placement consist of unaffiliated accredited institutional investors and affiliated accredited institutional investors. One of these investors, the Sprout Group, is affiliated with one of the Company’s Board members, Dr. Philippe O. Chambon. Under applicable rules of the NASDAQ Global Market, the second closing of the private placement, which included all shares issued to the Sprout Group and other affiliated accredited institutional investors, was subject to stockholder approval, which was obtained at a special meeting on July 31, 2008

Consistent with the requirements of our Audit Committee Charter, this transaction was reviewed and approved by our Audit Committee, which is comprised solely of independent directors, as well as our Board of Directors.

Off-Balance Sheet Arrangements

Since inception we have not engaged in any off-balance sheet financing activities except for leases which are properly classified as operating leases and disclosed in the “Liquidity and Capital Resources” section in the Annual Report on Form 10-K for the fiscal year ended December 31, 2007.

Recent Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board, or FASB, issued Statement No. 141(R),Business Combination,or SFAS 141 (R), a replacement of FASB Statement No. 141. SFAS 141(R) is effective for fiscal years beginning on or after December 15, 2008 and applies to all business combinations. SFAS 141(R) provides that, upon initially obtaining control, an acquirer shall recognize 100 percent of the fair values of acquired assets, including goodwill, and assumed liabilities, with only limited exceptions, even if the acquirer has not acquired 100 percent of its target. As a consequence, the current step acquisition model will be eliminated. Additionally, SFAS 141(R) changes current practice, in part, as follows: (1) contingent consideration arrangements will be fair valued at the acquisition date and included on that basis in the purchase price consideration; (2) transaction costs will be expensed as incurred, rather than capitalized as part of the purchase price; (3) pre-acquisition contingencies, such as legal issues, will generally have to be accounted for in purchase accounting at fair value; (4) changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense; and (5) in order to accrue for a restructuring plan in purchase accounting, the requirements in Statement of Financial Accounting Standards No. 146,Accounting for Costs Associated with Exit or Disposal Activities, would have to be met at the acquisition date. SFAS No. 141(R) is effective on a prospective basis for all business combinations for which the acquisition date is on or after the beginning of the first annual period subsequent to December 15, 2008, with the exception of the accounting for valuation allowances on deferred taxes and acquired tax contingencies. SFAS No. 141(R) amends SFAS No. 109 such that adjustments made to valuation allowances on deferred taxes and acquired tax contingencies associated with acquisitions that closed prior to the effective date of SFAS No. 141(R) would also follow the provisions of SFAS No. 141(R). Early adoption of the provisions of SFAS No. 141(R) is not permitted. We are currently evaluating the effects that SFAS No. 141(R) may have on our consolidated financial statements.

Effective January 1, 2008, we adopted the provisions of Statement of Financial Accounting Standards No. 157, Fair Value Measurements, or SFAS 157, for financial assets and liabilities. We will adopt the provisions of SFAS 157 for non-financial assets and liabilities that are measured or recognized at fair value on a non-recurring basis on January 1, 2009, in accordance with the partial deferral of this standard by FASB. We are currently evaluating the effects the provisions of SFAS 157 will have on non-financial assets and liabilities that are measured or recognized at fair value on a non-recurring basis. SFAS 157 defines fair value, establishes a framework for measuring fair value under accounting principles generally accepted in the United States of America, and enhances disclosures about fair value measurements. Fair value is defined under SFAS 157 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The adoption of SFAS No. 157 had no impact on previously reported results as all of the provisions were adopted prospectively.

We also adopted the provisions of Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, or SFAS 159, effective January 1, 2008. SFAS 159 allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. We have opted not to apply the fair value option to any financial assets or liabilities in the three and nine months ended September 30, 2008.

In December 2007, the SEC issued Staff Accounting Bulletin No. 110, or SAB 110. SAB 110 amends and replaces Question 6 of Section D.2 of Topic 14,Share-Based Payment. SAB 110 expresses the views of the staff regarding the use of the “simplified” method in developing an estimate of expected term of “plain vanilla” share options in accordance with FASB Statement No. 123(R),Share Based Payment.The use of the “simplified” method was scheduled to expire on December 31, 2007. SAB 110 extends the use of the “simplified” method for “plain vanilla” awards in certain situations. We currently use the “simplified” method to estimate the expected term for share option grants as we do not have enough historical experience to provide a reasonable estimate due to the limited period our equity shares have been publicly traded. We will continue to use the “simplified” method until we have enough historical experience to provide a reasonable estimate of expected term in accordance with SAB 110. SAB 110 is effective for options granted after December 31, 2007.

In April 2008, the FASB issued FASB Staff Position 142-3,Determination of the Useful Life of Intangible Assets, or FSP 142-3. FSP 142-3 amends FASB Statement No. 142,Goodwill and Other Intangible Assets, or SFAS No. 142, to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under FASB Statement No 141,Business Combinations, or SFAS No. 141, and other GAAP. FSP 142-3 is effective for fiscal years beginning after December 15, 2008. The guidance for determining the useful life of a recognized intangible asset is to be applied prospectively, therefore, the impact of the implementation of this pronouncement cannot be determined until the transactions occur.

In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162,The Hierarchy of Generally Accepted Accounting Principles, or SFAS 162. The current hierarchy under Generally Accepted Accounting Principles in the United States (“GAAP”), as set forth in the American Institute of Certified Public Accountants (“AICPA”) Statement on Auditing Standards No. 69,The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles, has been criticized because (1) it is directed to the auditor rather than the entity, (2) it is complex, and (3) it ranks FASB Statements of Financial Accounting Concepts. The FASB believes that the GAAP hierarchy should be directed to entities because it is the entity (not its auditor) that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. Accordingly, the FASB concluded that the GAAP hierarchy should reside in the accounting literature established by the FASB and is issuing this Statement to achieve that result. This Statement is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411,The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. We do not believe that the adoption of SFAS 162 will have a material impact on its results of operations, financial position or cash flow.

Item 3.Quantitative and Qualitative Disclosures About Market Risk

During the nine months ended September 30, 2008, there were no material changes in our market risk exposure. For quantitative and qualitative disclosures about market risk affecting NxStage, see Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2007. As of the date of this report, there have been no material changes to the market risks described in our Annual Report on Form 10-K for December 31, 2007.

Item 4.Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2008. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1943, or Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2008, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

No change in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended September 30, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1A.Risk Factors

In addition to the factors discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report, the following are some of the important risk factors that could cause our actual results to differ materially from those projected in any forward-looking statements.

Risks Related to our Business

We expect to derive a significant percentage of our future revenues from the rental or sale of our System One and a limited number of other products.

Since our inception, we have devoted substantially all of our efforts to the development of the System One and the related products used with the System One. We commenced marketing the System One and the related disposable products to the critical care market in February 2003. We commenced marketing the System One for chronic hemodialysis treatment in September 2004. Prior to the Medisystems Acquisition, nearly 100% of our revenues were derived from the rental or sale of our System One and the sale of related disposables. Although the Medisystems Acquisition broadens our product offerings, we expect that nearly all of our revenues will be derived from the sale of a limited number of key products primarily applicable to the dialysis business. We expect that in 2008 and in the foreseeable future, we will continue to derive a significant percentage of our revenues from the System One, and that we will derive the remainder of our revenues from the sale of a few key Medisystems’ disposable products, including blood tubing sets and needles. To the extent that any of our primary products is not commercially successful or is withdrawn from the market for any reason, our revenues will be adversely impacted, and we do not have other significant products in development that could replace these revenues.

We cannot accurately predict the size of the home hemodialysis market, and it may be smaller, and may develop more slowly than we expect.

We believe our largest future product market opportunity is the home hemodialysis market. However this market is presently very small and adoption of the home hemodialysis treatment options has been limited. The most widely adopted form of dialysis therapy used in a setting other than a dialysis clinic is peritoneal dialysis. Based on the most recently available data from the United States Renal Data System, or USRDS, the number of patients receiving peritoneal dialysis was approximately 26,000 in 2005, representing approximately 8% of all patients receiving dialysis treatment for ESRD in the United States. Very few ESRD patients receive hemodialysis treatment outside of the clinic setting. Because the adoption of home hemodialysis has been limited to date, the number of patients who desire to, and are capable of, administering their own hemodialysis treatment with a system such as the System One is unknown and there is limited data upon which to make estimates. Further, the number of nephrologists and dialysis clinics able or willing to prescribe home hemodialysis or establish and support home hemodialysis programs is also unknown. Many dialysis clinics do not presently have the infrastructure in place to support home hemodialysis and most don’t have the infrastructure in place to support a significant home hemodialysis patient population. Our long-term growth will depend on the number of patients who adopt home-based hemodialysis and how quickly they adopt it, which in turn is driven by the number of physicians willing to prescribe home hemodialysis and the number of dialysis clinics able or willing to establish and support home hemodialysis therapies. We do not know whether the number of home-based dialysis patients will be greater or fewer than the number of patients performing peritoneal dialysis.

Because nearly all our home hemodialysis patients are also receiving more frequent dialysis, meaning dialysis delivered five or more times a week, the market adoption of our System One for home hemodialysis is also dependent upon the penetration and market acceptance of more frequent hemodialysis. Given the increased provider supply costs associated with providing more frequent dialysis versus conventional three-times per week dialysis, market acceptance will be impacted, especially for Medicare patients, at least in part by whether dialysis clinics are able to obtain reimbursement for additional dialysis treatments provided in excess of three times a week. Presently, we understand that a number of our customers are unable to obtain such additional reimbursement, and that there are increased administrative burdens associated with articulating the medical justification for treatments beyond three times per week. Both of these facts will likely negatively impact the rate and extent of any further market expansion of our System One for home hemodialysis. Expanding Medicare reimbursement over time to predictably cover more frequent therapy, with less administrative burden for our customers, may be critical to our ability to significantly expand the market penetration of the System One in the home market and to grow our revenue in the future.

New regulations particularly impacting home hemodialysis technologies can also negatively impact the rate and extent of any further market expansion of our System One for home hemodialysis. In 2008, the Centers for Medicare and Medicaid Services released new Conditions for Coverage applicable to our customers. The new Conditions for Coverage impose water testing requirements on our patients using our PureFlow SL product. These water testing requirements increase the burden of our therapy for our patients and may impair market adoption, especially for our PureFlow SL product. To the extent additional regulations are introduced unique to the home environment, market adoption could be even further impaired.

Finally we are still early in the market launch of the System One for home hemodialysis. We received our home use clearance for

the System One from the FDA in June 2005 and we will need to continue to devote significant resources to developing the market. We cannot be certain that this market will develop, how quickly it will develop or how large it will be.

We will require significant capital to build our business, and financing may not be available to us on reasonable terms, if at all.

We have experienced negative operating margins and cash flows from operations and we expect to continue to incur net losses in the foreseeable future. In addition, our System One home market relies heavily upon a rental sales model whereby a significant percentage of our home customers rent rather than purchase System One equipment. This sales model requires significant amounts of working capital to manufacture System One equipment for rental to dialysis clinics. Our agreement with DaVita signed in early 2007 departs from the rental model, which helps us to conserve cash flow. However, it is not clear whether we will be able to replicate this sales model with a significant number of other customers in the future. In addition to these cash requirements, we will need to begin paying down the principal in February 2009 on the debt we borrowed under our GE Credit facility unless we are successful in negotiating a change in our repayment schedule.

We believe that we have the required resources to fund current operating requirements at least through 2009. In addition, we believe, based on current projections, that we have the required resources to fund operating requirements beyond 2009 provided that we restructure our repayment schedule on our current GE credit facility. Future capital requirements will depend on many factors, including availability of credit, the rate of revenue growth, continued progress on improving gross margins, the expansion of selling and marketing activities and research and development activities, the timing and extent of expansion into new geographies or territories, the timing of new product introductions and enhancement to existing products, the continuing market acceptance of products, and potential investments in, or acquisitions of complementary businesses, services or technologies. There is no assurance that additional capital will be available to us on favorable terms, if at all.

We have limited operating experience, a history of net losses and an accumulated deficit of $223.5 million at September 30, 2008. We cannot guarantee if, when and the extent that we will become profitable, or that we will be able to maintain profitability once it is achieved.

Since inception, we have incurred losses every quarter and at September 30, 2008, we had an accumulated deficit of approximately $223.5 million. We expect to incur increasing operating expenses as we continue to grow our business. Additionally, although we have achieved positive gross margins for our products, in aggregate, as of September 30, 2008, we cannot provide assurance that our gross margins will remain positive, continue to improve or, if they do improve, the rate at which they will improve. We cannot provide assurance that we will achieve profitability, when we will become profitable, the sustainability of profitability should it occur, or the extent to which we will be profitable. Our ability to become profitable is dependent principally upon implementing design and process improvements to lower our costs of manufacturing our products, accessing lower labor cost markets for the manufacture of our products, growing revenue, increasing our reliability, improving our field equipment utilization, achieving efficiencies in manufacturing and supply chain overhead costs, achieving efficient distribution of our products, achieving a sufficient scale of operations, and obtaining better purchasing terms and prices.

Our PureFlow SL hardware, introduced into the market in July 2006, is intended to improve our profitability. PureFlow SL is an accessory module to the System One that allows for the preparation of high purity dialysate in the patient’s home using ordinary tap water and dialysate concentrate, allowing patients with ESRD to more conveniently and effectively manage their home hemodialysis therapy by eliminating the need for bagged fluids. The gross margin of this product is expected to be more favorable to NxStage than the gross margin on our bagged fluids and is an important part of our strategy to achieve profitability. Since its launch, PureFlow SL penetration has reached over 70% of all of our home patients. We continue to work to improve product reliability, and to introduce PureFlow SL product design enhancements that will improve utilization of disposables and user experience. Any failure to further improve reliability and user experience, and to reduce the utilization of disposables, each of which is critical to achieving improved margins for PureFlow SL, would impair our ability to achieve profitability. Failure to further improve reliability will also negatively impact our distribution costs, which would adversely affect our ability to achieve profitability.

We have completed the transition of manufacturing of our Cycler and PureFlow equipment to Mexico and continue to transfer servicing to Mexico in order to take advantage of lower labor costs. Any failure or unforeseen difficulties in transitioning additional servicing to Mexico or to maintain or improve product reliability in the process, would adversely affect our ability to achieve profitability.

We entered into a secured credit facility in November 2007, and as of September 30, 2008, we had borrowed $30 million there under. We may not be able to borrow the full amount available under that credit facility, and we will need to begin repaying principal on the amounts we have already borrowed under that credit facility in February 2009. Further, if we fail to comply with all terms and covenants under our credit agreement, we may go into default under the credit facility which could trigger, among other things, the acceleration of all of our indebtedness there under or the sale of our assets.

On November 21, 2007 we obtained a $50.0 million credit and security agreement from a group of lenders led by Merrill Lynch Capital, which was acquired by GE, for a term of 42 months. The credit facility is secured by nearly all of our assets, other than intellectual property and consists of a $30.0 million term loan and a $20.0 million revolving credit facility. We borrowed $25.0 million under the term loan in November 2007, and borrowed the remaining $5.0 million in March 2008. We used $4.9 million of the proceeds from the term loan to repay all amounts owed under a term loan dated May 15, 2006 with Silicon Valley Bank. Borrowings under the term loan bear interest equal to LIBOR plus 6% per annum, fixed on November 21 for our first borrowings (at a rate of 10.77% per annum) and fixed on March 25 for our second borrowings (at a rate of 8.61% per annum) Interest on the term loan must

be paid on a monthly basis unless we are successful in restructuring our repayment schedule. Beginning on February 1, 2009, we must repay principal under the term loan in 29 equal monthly installments. We will also be required to pay a maturity premium of $0.9 million at the time of loan payoff. Our borrowing capacity under the revolving credit facility is subject to the satisfaction of certain conditions and calculation of the borrowing amount. There is no guarantee that we will be able to borrow the full amount, or any funds under the revolving credit facility. Any borrowings under the revolving credit facility will bear interest at LIBOR plus 4.25% per annum. There is an unused line fee of 0.75% per annum and descending deferred revolving credit facility commitment fees, which are charged in the event the revolving credit facility is terminated prior to May 21, 2011 of 4% in year one, 2% in year two, and 1% thereafter.

The credit facility includes covenants that (a) require us to achieve certain minimum net revenue and certain minimum EBITDA targets relating to the acquired MDS Entities, (b) place limitations on our and our subsidiaries’ ability to incur debt, (c) place limitations on our and our subsidiaries’ ability to grant or incur liens, carry out mergers, and make investments and acquisitions, and (d) place limitations on our and our subsidiaries’ ability to pay dividends, make other restricted payments, enter into transactions with affiliates, and amend certain contracts. The credit agreement contains customary events of default, including nonpayment, misrepresentation, breach of covenants, material adverse effects, and bankruptcy. In the event we fail to satisfy our covenants, or otherwise go into default, GE has a number of remedies, including sale of our assets, control of our cash and cash equivalents, and acceleration of all outstanding indebtedness. Any of these remedies would likely have a material adverse effect on our business.

We have filed a resale registration statement covering shares of our common stock that we recently sold in a private placement. If the holders of these shares are unable to sell the shares under the registration statement, we may be obligated to pay them damages, which could harm our financial condition.

We recently sold an aggregate of 9,555,556 shares of our common stock and warrants to purchase an additional 1,911,111 shares of our common stock in a private placement. We were required to register the common stock and the common stock issuable upon exercise of the warrants with the Securities and Exchange Commission, which we did on August 8, 2008. If the holders of the shares or the accompanying warrant shares are unable to sell such shares or warrant shares under the registration statement for more than 30 days in any 365 day period after the effectiveness of the registration statement, we may be obligated to pay damages equal to up to 1% of the share purchase price per month that the registration statement is not effective or the investors are unable to sell their shares.

We compete against other dialysis equipment manufacturers with much greater financial resources and established products and customer relationships, which may make it difficult for us to penetrate the market and achieve significant sales of our products.

Our product lines compete directly against products produced by Fresenius Medical Care AG, Baxter Healthcare, Gambro AB, B. Braun and others, each of which markets one or more FDA-cleared medical devices for the treatment of acute or chronic kidney failure. Each of these competitors offers products that have been in use for a longer time than our System One, and in some instances many of our Medisystems products, and are more widely recognized by physicians, patients and providers. These competitors have significantly more financial and human resources, more established sales, service and customer support infrastructures and spend more on product development and marketing than we do. Many of our competitors also have established relationships with the providers of dialysis therapy and, Fresenius owns and operates a chain of dialysis clinics. The product lines of most of these companies are broader than ours, enabling them to offer a broader bundle of products and have established sales forces and distribution channels that may afford them a significant competitive advantage. Finally, one of our competitors, Gambro AB, has been, until recently, subject to an import hold imposed by the FDA on its acute and chronic dialysis machines. Since the import hold has lifted, competition from Gambro has increased, which could impair our performance in the future in the critical care market.

The market for our products is competitive, subject to change and affected by new product introductions and other market activities of industry participants, including increased consolidation of ownership of clinics by large dialysis chains. If we are successful, our competitors are likely to develop products that offer features and functionality similar to our products, including our System One. Improvements in existing competitive products or the introduction of new competitive products may make it more difficult for us to compete for sales, particularly if those competitive products demonstrate better reliability, convenience or effectiveness or are offered at lower prices. Fresenius and Baxter have each made public statements that they are either contemplating or actively developing new and/or improved systems for home hemodialysis. Fresenius made these statements in connection with their recent acquisition of Renal Solutions, Inc., and Baxter made them in connection with the announcement of a research and development collaboration with DEKA Research & Development Corporation and HHD, LLC. We are unable to predict if or when products from these or other companies may attain regulatory clearance and appear in the market, or how successful they may be should they be introduced, but if additional viable products are introduced to the market, it would adversely affect our sales and growth. Our ability to successfully market our products could also be adversely affected by pharmacological and technological advances in preventing the progression of ESRD and/or in the treatment of acute kidney failure or fluid overload. If we are unable to compete effectively against existing and future competitors and existing and future alternative treatments and pharmacological and technological advances, it will be difficult for us to penetrate the market and achieve significant sales of our products.

The success and growth of our business will depend upon our ability to achieve expanded market acceptance of our System One and Streamline products.

Our System One products still have limited product and brand recognition and have only been used at a limited number of dialysis clinics and hospitals. In the home market, we have to convince four distinct constituencies involved in the choice of dialysis therapy, namely operators of dialysis clinics, nephrologists, dialysis nurses and patients, that our system provides an effective alternative to other existing dialysis equipment. Each of these constituencies use different considerations in reaching their decision. Lack of acceptance by any of these constituencies will make it difficult for us to grow our business. We may have difficulty gaining

widespread or rapid acceptance of the System One for a number of reasons including:

	§		the failure by us to demonstrate to patients, operators of dialysis clinics, nephrologists, dialysis nurses and others that our product is equivalent or superior to existing therapy options, or that the cost or risk associated with use of our product is not greater than available alternatives;

	§		competition from products sold by companies with longer operating histories and greater financial resources, more recognizable brand names and better established distribution networks and relationships with dialysis clinics;

	§		the failure by us to continue to improve product reliability and the ease of use of our products;

	§		limitations on the existing infrastructure in place to support home hemodialysis, including without limitation, home hemodialysis training nurses, and the willingness, cost associated with, and ability of dialysis clinics to build that infrastructure;

	§		the ownership and operation of some dialysis providers by companies that also manufacture and sell competitive dialysis products;

	§		the introduction of competing products or treatments that may be more effective, easier to use or less expensive than ours;

	§		regulations that impose additional burden on patients and their caregivers, such as the newly adopted Medicare conditions for coverage which impose additional water testing requirements in connection with the use of our PureFlow SL;

	§		the number of patients willing and able to perform therapy independently, outside of a traditional dialysis clinic, may be smaller than we estimate; and

	§		the continued availability of satisfactory reimbursement from healthcare payors, including Medicare and assuming no negative impact of the “bundle” payment method to be introduced by medicare in 2011.

In addition, the future growth of our business depends, to a lesser degree, upon the successful launch and market acceptance of our latest generation blood tubing set product, Streamline. Streamline is designed to be a high-quality, high-performance blood tubing set that promises to yield valuable savings and improved patient outcomes for those clinics that adopt it for use. Market penetration of this product is quite limited to date, and it is not possible to predict whether and to what extent current and future customers will elect to use this product instead of more established or competitive blood tubing sets. If we are unable to convert customers to the Streamline product and receive more widespread commercial acceptance of this product, our ability to achieve our growth objectives could be impaired.

Current Medicare reimbursement rates, at three times per week, limit the price at which we can market our home products, and adverse changes to reimbursement would likely negatively affect the adoption or continued sale of our home products.

Our ability to attain profitability will be driven in part by our ability to set or maintain adequate pricing for our products. As a result of legislation passed by the U.S. Congress more than 30 years ago, Medicare provides comprehensive and well-established reimbursement in the United States for ESRD. With over 80% of U.S. ESRD patients covered by Medicare, the reimbursement rate is an important factor in a potential customer’s decision to use the System One or our other products and limits the fee for which we can rent or sell our products. Additionally, current CMS rules limit the number of hemodialysis treatments paid for by Medicare to three times a week, unless there is medical justification for additional treatments. Most patients using the System One in the home treat themselves, with the help of a partner, up to six times per week. To the extent that Medicare contractors elect not to pay for the additional treatments, adoption of the System One would likely be impaired. The determination of medical justification must be made at the local Medicare contractor level on a case-by-case basis, based on documentation provided by our customers. If daily therapy is prescribed, a clinic’s decision as to how much it is willing to spend on dialysis equipment and services will be at least partly dependent on whether Medicare will reimburse more than three treatments per week for the clinic’s patients. In the next two years, Medicare will be switching from intermediaries to Medicare authorized contractors. This change in the reviewing entity for Medicare claims could lead to a change in whether a customer receives Medicare reimbursement for additional treatments. If an adverse change to historical payment practices occurs, market adoption of our System One in the home market may be impaired. Presently, we understand that a number of our customers are unable to obtain additional reimbursement for more frequent therapy, and that there are increased administrative burdens associated with articulating the medical justification for treatments beyond three times a week. Both of these facts will likely negatively impact the rate and extent of any further market expansion of our System One for home hemodialysis. Expanding Medicare reimbursement over time to more predictably cover more frequent therapy, with less administrative burden for our customers, may be critical to our ability to significantly expand the market penetration of the System One in the home market and to our revenue growth in the future. Additionally, any adverse changes in the rate paid by Medicare for ESRD treatments in general would likely negatively affect demand for our products in the home market and the prices we charge to them. In 2011, CMS has announced that it will implement a new “bundled” payment for dialysis treatment. It is not possible at this time to determine what impact this will have, if any, on the adoption of home and/or daily hemodialysis.

As we continue to commercialize the System One, Streamline and our other products, we may have difficulty managing our growth and expanding our operations successfully.

As the commercial launch of the System One and Streamline continues, we will need to expand our regulatory, manufacturing, sales and marketing and on-going development capabilities or contract with other organizations to provide these capabilities for us. As our operations expand, we expect that we will need to manage additional relationships with various partners, suppliers, manufacturers and other organizations. Our ability to manage our operations and growth requires us to continue to improve our information

technology infrastructure, operational, financial and management controls and reporting systems and procedures. Such growth could place a strain on our administrative and operational infrastructure. We may not be able to make improvements to our management information and control systems in an efficient or timely manner and may discover deficiencies in existing systems and controls.

If we are unable to improve on the product reliability of our System One product, our ability to grow our business and achieve profitability could be impaired.

We continue to experience product reliability issues associated with our System One and PureFlow SL that are higher than we expect long-term, and have led us to incur increased service and distribution costs, as well as increase the size of our field equipment base. This, in turn, negatively impacts our gross margins and increases our working capital requirements. Additionally, product reliability issues can also lead to decreases in customer satisfaction and our ability to grow or maintain our revenues. We continue to work to improve product reliability for these products, and have achieved some improvements to date. If we are unable to continue to improve product reliability of our System One products, our ability to achieve our growth objectives as well as profitability could be significantly impaired.

We have a significant amount of System One field equipment, and our ability to effectively manage this asset could negatively impact our working capital requirements and future profitability.

Because a significant percentage of our System One home care business continues to rely upon an equipment rental model, our ability to manage System One equipment is important to minimizing our working capital requirements. In addition, our gross margins may be negatively impacted if we have excess equipment deployed, and unused, in the field. If we are unable to successfully track, service and redeploy equipment, we could (1) incur increased costs, (2) realize increased cash requirements and/or (3) have material write-offs of equipment. This barrier would negatively impact our working capital requirements and future profitability.

Our national service provider agreement with DaVita confers certain geographic market rights to DaVita and limits our ability to sell the System One in the home market to Fresenius, both of which may present a barrier to adoption of the System One in the home.

Fresenius and DaVita own and operate the two largest chains of dialysis clinics in the United States. Fresenius controls approximately 33% of the U.S. dialysis clinics and is the largest worldwide manufacturer of dialysis systems. DaVita controls approximately 27% of the U.S. dialysis clinics, and has entered into a preferred supplier agreement with Gambro pursuant to which Gambro will provide a significant majority of DaVita’s dialysis equipment and supplies for a period of at least 10 years. Each of Fresenius and DaVita may choose to offer their dialysis patients only the dialysis equipment manufactured by them or their affiliates, to offer the equipment they contractually agreed to offer or to otherwise limit access to the equipment manufactured by competitors.

Our recent agreement with DaVita confers certain market rights for the System One and related supplies for home hemodialysis therapy. DaVita is granted exclusive rights in a small percentage of geographies, which geographies collectively represent less than 10% of the U.S. ESRD patient population, and limited exclusivity in the majority of all other U.S. geographies, subject to DaVita’s meeting certain requirements, including patient volume commitments and new patient training rates. Under the agreement, we can continue to sell to other clinics in the majority of geographies. If certain minimum patient numbers or training rates are not achieved, DaVita can lose all or part of its preferred geographic rights. The agreement further limits, but does not prohibit, the sale by NxStage of the System One for chronic home patient hemodialysis therapy to any provider that is under common control or management of a parent entity that collectively provides dialysis services to more than 25% of U.S. chronic dialysis patients and that also supplies dialysis products. Therefore, our ability to sell the System One for chronic home patient hemodialysis therapy to Fresenius is presently limited.

As of September 30, 2008, approximately 50% of our home hemodialysis patients in the home market received treatment through clinics owned by DaVita. Although we expect that DaVita will continue to be a significant customer of ours, the agreement imposes no purchase obligations upon DaVita and we cannot be certain whether DaVita will continue to purchase and/or rent the System One from us in the future. We believe that any future decision by DaVita to stop or limit the use of the System One would adversely affect our business, at least in the near term.

DaVita as a key customer for our System One and In-Center product lines. The partial or complete loss of DaVita as a customer would materially impair our financial results, at least in the near term.

DaVita is our most significant customer. Sales through distributors to DaVita of products accounted for half of In-Center segment revenues in the quarter ended September 30, 2008, and direct sales to DaVita accounted for approximately 37% of our System One segment revenues in the quarter ended September 30, 2008. Our contract for Medisystems blood tubing sets and needles with DaVita includes certain minimum order requirements; however, these can be reduced significantly under certain circumstances. DaVita’s commitment to purchase Medisystems’ blood tubing sets was originally set to expire in September 2008. However, in September 2008, prior to the expiration of the contract, we signed an amendment to the DaVita agreement which extended the term with respect to blood tubing sets for one year through September 2009. We cannot guarantee we will be able to negotiate a new contract with DaVita or an additional extension of the existing agreement on favorable terms, if at all, or the extent to which DaVita will purchase Medisystems’ products. DaVita’s preferred supplier agreement with Gambro may impair our ability to obtain DaVita’s blood tubing set business beyond September 2009. NxStage’s national service provider agreement with DaVita does not impose minimum purchase requirements, and expires as early as the end of 2009. The partial or complete loss of DaVita as a customer for either of these product lines would adversely affect our business, at least in the near term. Further, given the significance of DaVita as a customer, any change

in DaVita’s ordering or clinical practices can have a significant impact on our revenues, especially in the near term.

If kidney transplantation becomes a viable treatment option for more patients with ESRD, or if medical or other solutions for renal replacement become viable, the market for our products may be limited.

While kidney transplantation is the treatment of choice for most ESRD patients, it is not currently a viable treatment for most- patients due to the limited number of donor kidneys, the high incidence of kidney transplant rejection and the higher surgical risk associated with older ESRD patients. According to the most recent USRDS data, in 2004, approximately 17,000 patients received kidney transplants in the United States. The development of new medications designed to reduce the incidence of kidney transplant rejection, progress in using kidneys harvested from genetically engineered animals as a source of transplants or any other advances in kidney transplantation could limit the market for our products. The development of viable medical or other solutions for renal replacement may also limit the market for our products.

If we are unable to convince additional hospitals and healthcare providers of the benefits of our products for the treatment of acute kidney failure and fluid overload, we will not be successful in increasing our market share in the critical care market.

We sell the System One for use in the treatment of acute kidney failure and fluid overload associated with, among other conditions, congestive heart failure. Physicians currently treat most acute kidney failure patients using conventional hemodialysis systems or dialysis systems designed specifically for use in the ICU. We will need to convince hospitals and healthcare providers that using the System One is as effective as using conventional hemodialysis systems or ICU specific dialysis systems for treating acute kidney failure and that it provides advantages over conventional systems or other ICU specific systems because of its significantly smaller size, ease of operation and clinical flexibility. In addition, the impact of tightened credit markets on hospitals could impair the manner in which we sell products in the Critical Care market. Hospitals facing pressure to reduce capital spending may choose to delay capital equipment purchases or seek alternative financing options. One of our competitors in the critical care market, Gambro AB, has been subject to an FDA import hold that was recently lifted. Since the import hold has lifted, competition from Gambro has increased, which could impair our performance in the future in the critical care market.

We could be subject to costly and damaging product liability claims and may not be able to maintain sufficient product liability insurance to cover claims against us.

If any of our products is found to have caused or contributed to injuries or deaths, we could be held liable for substantial damages. Claims of this nature may also adversely affect our reputation, which could damage our position in the market. While we maintain insurance, including product and excess liability insurance, claims may be brought against us that could result in court judgments or settlements in amounts that are in excess of the limits of our insurance coverage. In addition, due to the recent tightening of global credit and the disruption in the financial markets, there may be a disruption in our insurance coverage or delay or disruption in the payment of claims by our insurance providers. Our insurance policies also have various exclusions, and we may be subject to a product liability claim for which we have no coverage. We will have to pay any amounts awarded by a court or negotiated in a settlement that exceed our coverage limitations or that are not covered by our insurance.

Any product liability claim brought against us, with or without merit, could result in the increase of our product liability insurance rates or the inability to secure additional insurance coverage in the future. A product liability claim, whether meritorious or not, could be time consuming, distracting and expensive to defend and could result in a diversion of management and financial resources away from our primary business, in which case our business may suffer.

We maintain insurance at levels deemed adequate by management; however, future claims could exceed our applicable insurance coverage.

We maintain insurance for property and general liability, directors’ and officers’ liability, workers compensation, and other coverage in amounts and on terms deemed adequate by management based on our expectations for future claims. Future claims could, however, exceed our applicable insurance coverage, or our coverage could not cover the applicable claims.

We face risks associated with having international manufacturing operations, and if we are unable to manage these risks effectively, our business could suffer.

In addition to our operations in Massachusetts, we operate manufacturing facilities in Germany, Italy and Mexico. We also purchase components and supplies from foreign vendors. We are subject to a number of risks and challenges that specifically relate to these international operations, and we may not be successful if we are unable to meet and overcome these challenges. Significant among these risks are risks relating to foreign currency, in particular the Thai Baht, Euro and Peso. The U.S. dollar has weakened materially against the Thai Baht and Euro over the last five years and may continue to do so. To the extent we fail to control our exchange rate risk, our profitability could suffer and our ability to maintain mutually beneficial and profitable relationships with foreign vendors could be impaired. In addition to these risks, through our international operations, we are exposed to costs associated with sourcing and shipping goods internationally, difficulty managing operations in multiple locations and local regulations that may restrict or impair our ability to conduct our operations.

We currently rely upon a third-party manufacturer to manufacture a significant percentage of our blood tubing set products using our supplied components and all of our needles. Kawasumi’s contractual obligation to manufacture blood tubing sets expires in January 2010 and its obligation to supply needles expires in February 2011. In the event these agreements are not renewed or extended upon favorable terms, if at all, or in the event we are unable to sufficiently expand our manufacturing capabilities, or

obtain alternative third party supply prior to the expiration of these agreements, our growth and ability to meet customer demand would be impaired.

Historically, Medisystems has relied upon a third-party manufacturer, Kawasumi, to manufacture a significant percentage of its blood tubing set products using Medisystems’ supplied components. This third party has a strong history of manufacturing high-quality product for Medisystems. In May 2008 we negotiated a new agreement with Kawasumi extending their obligation to supply blood tubing sets to us through January 31, 2010. We cannot be certain that this agreement will be renewed or extended beyond this term on favorable terms, if at all, that we would be able to manufacture independently the volume of products currently manufactured by Kawasumi, and therefore whether we would have sufficient capacity to meet all of our customer demand, that we would be able to manufacture products at the same cost at which we currently purchase products from Kawasumi or that we could find a third party to supply blood tubing sets on favorable terms, if at all, the failure of any of which could impair our business. We also depend solely on Kawasumi for all of our finished goods needles. Kawasumi’s obligation to supply needles to us expires in February 2011. In the event this agreement is not renewed or extended upon favorable terms, if at all, if we are unable to manufacture comparable needles for ourselves prior to the contract expiration, or if we are unable to obtain comparable needles from another third party on favorable terms, if at all, the revenues and profitability of our business will be impaired.

Our In-Center business relies heavily upon third-party distributors.

We sell the majority of our In-Center products through three distributors, which collectively accounted for substantially all of In-Center revenues for the quarter ended September 30, 2008, with our primary distributor, Schein, accounting for approximately 80% of In-Center revenues for the quarter ended September 30, 2008. Schein recently agreed to extend their distribution relationship with us through July 2009. The contracts with the other two distributors of our products are scheduled to expire in July 2011 and July 2009. Our relationship with Schein, in particular, is very significant for our business and any failure to continue this relationship would be harmful to our business, because our current sales force has limited experience selling blood tubing sets or needles.

Unless we can demonstrate sufficient product differentiation in our blood tubing set business through Streamline or products that we introduce in the future, we will continue to be susceptible to further pressures to reduce product pricing and more vulnerable to the loss of our blood tubing set business to competitors in the dialysis industry.

Our blood tubing set business has historically been a commodities business. Prior to the Medisystems Acquisition, Medisystems competed favorably and gained share through the development of a high quality, low-cost, standardized blood tubing set, which could be used on several different dialysis machines. Our products continue to compete favorably in the dialysis blood tubing set business, but are increasingly subject to pricing pressures, especially given recent market consolidation in the U.S. dialysis services industry, with Fresenius and DaVita collectively controlling approximately 60% of U.S. dialysis services business. Unless we can successfully demonstrate to customers the differentiating features of the Streamline product or products that we introduce in the future, we may be susceptible to further pressures to reduce our product pricing and more vulnerable to the loss of our blood tubing set business to competitors in the dialysis industry. In addition, DaVita’s preferred supplier agreement with Gambro may impair our ability to obtain DaVita’s blood tubing set business beyond the expiration of our blood tubing set agreement with DaVita that expires in September 2009.

The activities of our business involve the import of finished goods into the United States from foreign countries, subject to customs inspections and duties, and the export of components and certain other products from other countries into Mexico and Thailand. If we misinterpret or violate these laws, or if laws governing our exemption from certain duties changes, we could be subject to significant fines, liabilities or other adverse consequences.

We import into the United States disposable medical supplies from Thailand and Mexico. We also import into the United States disposable medical components from China, Germany and Italy and export components and assemblies into Mexico, Thailand and Italy. The import and export of these items are subject to extensive laws and regulations with which we will need to comply. To the extent we fail to comply with these laws or regulations, or fail to interpret our obligations accurately, we may be subject to significant fines, liabilities and a disruption to our ability to deliver product, which could cause our combined businesses and operating results to suffer. To the extent there are modifications to the Generalised System of Preferences or cancellation of the Nairobi Protocol Classification such that our products would be subject to duties, our profitability would also be negatively impacted.

The inability to successfully integrate the operations and personnel of Medisystems and NxStage, or any significant delay in achieving integration, could have a material adverse effect on our business.

Integrating the operations and personnel of Medisystems and NxStage has required, and continues to require, a significant investment of management’s time and effort as well as the investment of capital, particularly with respect to information systems. The continued successful integration of Medisystems and NxStage will require, among other things, coordination of certain manufacturing operations and sales and marketing operations and the integration of Medisystems’ operations into our existing organization. The diversion of the attention of our senior management and any difficulties encountered in the process of combining the companies could cause the disruption of, or a loss of momentum in, the activities of our business. The inability to successfully integrate the operations and personnel of Medisystems and NxStage, or any significant delay in achieving integration, could have a material adverse effect on our business and, as a result, on the market price of our common stock.

The success of our business depends on the services of each of our senior executives as well as certain key engineering, scientific, manufacturing, clinical and marketing personnel, the loss of whom could negatively affect the combined businesses.

Our success has always depended upon the skills, experience and efforts of our senior executives and other key personnel, including our research and development and manufacturing executives and managers. Much of our expertise is concentrated in relatively few employees, the loss of whom for any reason could negatively affect our business. Competition for our highly skilled employees is intense and we cannot prevent the future resignation of any employee. We maintain key person insurance for only one of our executives, Jeffrey Burbank, our Chief Executive Officer.

Risks Related to the Regulatory Environment

We are subject to significant regulation, primarily by the FDA. We cannot market or commercially distribute our products without obtaining and maintaining necessary regulatory clearances or approvals.

Our products are medical devices subject to extensive regulation in the United States, and in foreign markets we may wish to enter. To market a medical device in the United States, approval or clearance by the FDA is required, either through the pre-market approval process or the 510(k) clearance process. We have obtained the FDA clearances necessary to sell our current products under the 510(k) clearance process. Medical devices may only be promoted and sold for the indications for which they are approved or cleared. In addition, even if the FDA has approved or cleared a product, it can take action affecting such product approvals or clearances if serious safety or other problems develop in the marketplace. We may be required to obtain 510(k) clearances or pre-market approvals for additional products, product modifications, or for new indications for our products. Presently, we are pursuing a nocturnal indication for the System One under an IDE study started in the first quarter of 2008. We cannot provide assurance that this or other clearances or approvals will be forthcoming, or, if forthcoming, what the timing and expense of obtaining such clearances or approvals might be. Delays in obtaining clearances or approvals could adversely affect our ability to introduce new products or modifications to our existing products in a timely manner, which would delay or prevent commercial sales of our products.

Modifications to our marketed devices may require new regulatory clearances or pre-market approvals, or may require us to cease marketing or recall the modified devices until clearances or approvals are obtained.

Any modifications to a 510(k) cleared device that could significantly affect its safety or effectiveness, or would constitute a major change in its intended use, requires the submission of another 510(k) pre-market notification to address the change. Although in the first instance we may determine that a change does not rise to a level of significance that would require us to make a pre-market notification submission, the FDA may disagree with us and can require us to submit a 510(k) for a significant change in the labeling, technology, performance specifications or materials or major change or modification in intended use, despite a documented rationale for not submitting a pre-market notification. We have modified various aspects of our products and have filed and received clearance from the FDA with respect to some of the changes in the design of our products. If the FDA requires us to submit a 510(k) for any modification to a previously cleared device, or in the future a device that has received 510(k) clearance, we may be required to cease marketing the device, recall it, and not resume marketing until we obtain clearance from the FDA for the modified version of the device. Also, we may be subject to regulatory fines, penalties and/or other sanctions authorized by the Federal Food, Drug, and Cosmetic Act. In the future, we intend to introduce new products and enhancements and improvements to existing products. We cannot provide assurance that the FDA will clear any new product or product changes for marketing or what the timing of such clearances might be. In addition, new products or significantly modified marketed products could be found to be not substantially equivalent and classified as products requiring the FDA’s approval of a pre-market approval application, or PMA, before commercial distribution would be permissible. PMAs usually require substantially more data than 510(k) submissions and their review and approval or denial typically takes significantly longer than a 510(k) decision of substantial equivalence. Also, PMA products require approval supplements for any change that affects safety and effectiveness before the modified device may be marketed. Delays in our receipt of regulatory clearance or approval will cause delays in our ability to sell our products, which will have a negative effect on our revenues growth.

Even if we obtain the necessary FDA clearances or approvals, if we or our suppliers fail to comply with ongoing regulatory requirements our products could be subject to restrictions or withdrawal from the market.

We are subject to the MDR regulations that require us to report to the FDA if our products may have caused or contributed to patient death or serious injury, or if our device malfunctions and a recurrence of the malfunction would likely result in a death or serious injury. We must also file reports of device corrections and removals and adhere to the FDA’s rules on labeling and promotion. Our failure to comply with these or other applicable regulatory requirements could result in enforcement action by the FDA, which may include any of the following:

	§		untitled letters, warning letters, fines, injunctions and civil penalties;

	§		administrative detention, which is the detention by the FDA of medical devices believed to be adulterated or misbranded;

	§		customer notification, or orders for repair, replacement or refund;

	§		voluntary or mandatory recall or seizure of our products;

	§		operating restrictions, partial suspension or total shutdown of production;

	§		refusal to review pre-market notification or pre-market approval submissions;

	§		rescission of a substantial equivalence order or suspension or withdrawal of a pre-market approval; and

	§		criminal prosecution.

Our products are subject to market withdrawals or product recalls after receiving FDA clearance or approval, and market withdrawals and product recalls could cause the price of our stock to decline and expose us to product liability or other claims or could otherwise harm our reputation and financial results.

Medical devices can experience performance problems in the field that require review and possible corrective action by us or the product manufacturer. We cannot provide assurance that component failures, manufacturing errors, design defects and/or labeling inadequacies, which could result in an unsafe condition or injury to the operator or the patient will not occur. These could lead to a government mandated or voluntary recall by us. The FDA has the authority to require the recall of our products in the event a product presents a reasonable probability that it would cause serious adverse health consequences or death. Similar regulatory agencies in other countries have similar authority to recall devices because of material deficiencies or defects in design or manufacture that could endanger health. We believe that the FDA would request that we initiate a voluntary recall if a product was defective or presented a risk of injury or gross deception. Any recall would divert management attention and financial resources, could cause the price of our stock to decline and expose us to product liability or other claims and harm our reputation with customers.

If we or our contract manufacturers fail to comply with FDA’s Quality System regulations, our manufacturing operations could be interrupted, and our product sales and operating results could suffer.

Our finished goods manufacturing processes, and those of some of our contract manufacturers, are required to comply with the FDA’s Quality System Regulations, or QSRs, which cover the procedures and documentation of the design, testing, production, control, quality assurance, labeling, packaging, sterilization, storage and shipping of our devices. The FDA enforces its QSRs through periodic unannounced inspections of manufacturing facilities. We and our contract manufacturers have been, and anticipate in the future being, subject to such inspections. Our Lawrence, MA U.S. manufacturing facility has previously had three FDA QSR inspections. The first resulted in one observation, which was rectified during the inspection and required no further response from us. Our last two inspections, including our most recent inspection in March 2006, resulted in no observations. Medisystems has been inspected by the FDA on eight occasions, and all inspections resulted in no action indicated. We cannot provide assurance that we can maintain a comparable level of regulatory compliance in the future at our facilities.

We cannot provide assurance that any future inspections would have the same result. If one of our manufacturing facilities or those of any of our contract manufacturers fails to take satisfactory corrective action in response to an adverse QSR inspection, FDA could take enforcement action, including issuing a public warning letter, shutting down our manufacturing operations, embargoing the import of components from outside of the United States, recalling our products, refusing to approve new marketing applications, instituting legal proceedings to detain or seize products or imposing civil or criminal penalties or other sanctions, any of which could cause our business and operating results to suffer.

Changes in reimbursement for acute kidney failure could negatively affect the adoption of our critical care products and the level of our future critical care product revenues.

Unlike Medicare reimbursement for ESRD, Medicare only reimburses healthcare providers for acute kidney failure and fluid overload treatment if the patient is otherwise eligible for Medicare, based on age or disability. Medicare and many other third-party payors and private insurers reimburse these treatments provided to hospital inpatients under a traditional DRG system. Under this system, reimbursement is determined based on a patient’s primary diagnosis and is intended to cover all costs of treating the patient. The presence of acute kidney failure or fluid overload increases the severity of the primary diagnosis and, accordingly, may increase the amount reimbursed. For care of these patients to be cost-effective, hospitals must manage the longer hospitalization stays and significantly more nursing time typically necessary for patients with acute kidney failure and fluid overload. If we are unable to convince hospitals that our System One provides a cost-effective treatment alternative under this diagnosis related group reimbursement system, they may not purchase our product. In addition, changes in Medicare reimbursement rates for hospitals could negatively affect demand for our products and the prices we charge for them.

Legislative or regulatory reform of the healthcare system may affect our ability to sell our products profitably.

In both the United States and foreign countries, there have been legislative and regulatory proposals to change the healthcare system in ways that could affect our ability to sell our products profitably. The federal government and some states have enacted healthcare reform legislation, and further federal and state proposals are likely. We cannot predict the exact form this legislation may take, the probability of passage, or the ultimate effect on us. Our business could be adversely affected by future healthcare reforms or changes in Medicare.

Failure to obtain regulatory approval in foreign jurisdictions would prevent us from marketing our products outside the United States.

Presently we do not sell or market the System One outside the United States and Canada, but we intend to look to other markets in the future. Our Medisystems products are presently sold in the United States as well as in several other countries, through distributors. In order to market directly our products in the EU or other foreign jurisdictions, we must obtain separate regulatory approvals and comply with numerous and varying regulatory requirements. The approval procedure varies from country to country and can involve additional testing. The time required to obtain approval abroad may be longer than the time required to obtain FDA clearance. The foreign regulatory approval process includes many of the risks associated with obtaining FDA clearance and we may not obtain foreign regulatory approvals on a timely basis, if at all. FDA clearance does not ensure approval by regulatory authorities in other countries, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign

countries. We may not be able to file for regulatory approvals and may not receive necessary approvals to commercialize our products in any market outside the United States, which could negatively effect our overall market penetration.

We currently have obligations under our contracts with dialysis clinics and hospitals to protect the privacy of patient health information.

In the course of performing our business we obtain, from time to time, confidential patient health information. For example, we learn patient names and addresses when we ship our System One supplies to home hemodialysis patients. We may learn patient names and be exposed to confidential patient health information when we provide training on our products to our customer’s staff. Our home hemodialysis patients may also call our customer service representatives directly and, during the call, disclose confidential patient health information. U.S. Federal and state laws protect the confidentiality of certain patient health information, in particular individually identifiable information, and restrict the use and disclosure of that information. At the federal level, the Department of Health and Human Services promulgated health information and privacy and security rules under the Health Insurance Portability and Accountability Act of 1996, or HIPAA. At this time, we are not a HIPAA covered entity and consequently are not directly subject to HIPAA. However, we have entered into several business associate agreements with covered entities that contain commitments to protect the privacy and security of patients’ health information and, in some instances, require that we indemnify the covered entity for any claim, liability, damage, cost or expense arising out of or in connection with a breach of the agreement by us. If we were to violate one of these agreements, we could lose customers and be exposed to liability and/or our reputation and business could be harmed. In addition, conduct by a person that is not a covered entity could potentially be prosecuted under aiding and abetting or conspiracy laws if there is an improper disclosure or misuse of patient information.

Many state laws apply to the use and disclosure of health information, which could affect the manner in which we conduct our business. Such laws are not necessarily preempted by HIPAA, in particular those laws that afford greater protection to the individual than does HIPAA. Such state laws typically have their own penalty provisions, which could be applied in the event of an unlawful action affecting health information.

We are subject to federal and state laws prohibiting “kickbacks” and false and fraudulent claims which, if violated, could subject us to substantial penalties. Additionally, any challenges to or investigation into our practices under these laws could cause adverse publicity and be costly to respond to, and thus could harm our business.

The Medicare/ Medicaid anti-kickback laws, and several similar state laws, prohibit payments that are intended to induce physicians or others either to refer patients or to acquire or arrange for or recommend the acquisition of healthcare products or services. These laws affect our sales, marketing and other promotional activities by limiting the kinds of financial arrangements, including sales programs; we may have with hospitals, physicians or other potential purchasers or users of medical devices. In particular, these laws influence, among other things, how we structure our sales and rental offerings, including discount practices, customer support, education and training programs and physician consulting and other service arrangements. Although we seek to structure such arrangements in compliance with applicable requirements, these laws are broadly written, and it is often difficult to determine precisely how these laws will be applied in specific circumstances. If one of our sales representatives were to offer an inappropriate inducement to purchase our products to a customer, we could be subject to a claim under the Medicare/ Medicaid anti-kickback laws.

Other federal and state laws generally prohibit individuals or entities from knowingly presenting, or causing to be presented, claims for payments from Medicare, Medicaid or other third-party payors that are false or fraudulent, or for items or services that were not provided as claimed. Although we do not submit claims directly to payors, manufacturers can be held liable under these laws if they are deemed to “cause” the submission of false or fraudulent claims by providing inaccurate billing or coding information to customers, or through certain other activities. In providing billing and coding information to customers, we make every effort to ensure that the billing and coding information furnished is accurate and that treating physicians understand that they are responsible for all billing and prescribing decisions, including the decision as to whether to order dialysis services more frequently than three times per week. Nevertheless, we cannot provide assurance that the government will regard any billing errors that may be made as inadvertent or that the government will not examine our role in providing information to our customers concerning the benefits of daily therapy. Anti-kickback and false claims laws prescribe civil, criminal and administrative penalties for noncompliance, which can be substantial. Moreover, an unsuccessful challenge or investigation into our practices could cause adverse publicity, and be costly to respond to, and thus could harm our business and results of operations.

Foreign governments tend to impose strict price controls, which may adversely affect our future profitability.

Although we have not initiated any marketing efforts in jurisdictions outside of the United States and Canada, we intend in the future to market our products in other markets. Certain products of ours are distributed outside the United States and Canada via distributors and customers. In some foreign countries, particularly in the European Union, the pricing of medical devices is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we may be required to supply data that compares the cost-effectiveness of our products to other available therapies. If reimbursement of our products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, it may not be profitable to sell our products outside of the United States, which would negatively affect the long-term growth of our business.

Our business activities involve the use of hazardous materials, which require compliance with environmental and occupational safety laws regulating the use of such materials. If we violate these laws, we could be subject to significant fines, liabilities or other

adverse consequences.

Our research and development programs as well as our manufacturing operations involve the controlled use of hazardous materials. Accordingly, we are subject to federal, state and local laws governing the use, handling and disposal of these materials. Although we believe that our safety procedures for handling and disposing of these materials comply in all material respects with the standards prescribed by state and federal regulations, we cannot completely eliminate the risk of accidental contamination or injury from these materials. In the event of an accident or failure to comply with environmental laws, we could be held liable for resulting damages, and any such liability could exceed our insurance coverage.

Risks Related to Operations

We obtain some of our raw materials or components from a single source or a limited group of suppliers. We also obtain sterilization services from a single supplier. The partial or complete loss of one of these suppliers could cause significant production delays, an inability to meet customer demand and a substantial loss in revenues.

We depend on a number of single-source suppliers for some of the raw materials and components we use in its products. We also obtain sterilization services from a single supplier. Presently, B. Braun Avitum AG is our only supplier of bicarbonate-based dialysate used with the System One; Membrana GmbH is our only supplier of the fiber used in our filters; PISA is our sole supplier of lactate-based dialysate, and Kawasumi is our only supplier of needles. We also obtain certain other components from other single source suppliers or a limited group of suppliers. Our dependence on single source suppliers of components, subassemblies and finished goods exposes us to several risks, including disruptions in supply, price increases, late deliveries, and an inability to meet customer demand. This could lead to customer dissatisfaction, damage to our reputation, or customers switching to competitive products. Any interruption in supply could be particularly damaging to our customers using the System One to treat chronic ESRD and who need access to the System One and related disposables.

Finding alternative sources for these components and subassemblies would be difficult in many cases and may entail a significant amount of time and disruption. In the case of Membrana, for fiber, we are contractually prevented from obtaining an alternative source of supply, except in certain limited instances. In the case of other suppliers, we would need to change the components or subassemblies if we sourced them from an alternative supplier. This, in turn, could require a redesign of our System One or other products and, potentially, further FDA clearance or approval of any modification, thereby causing further costs and delays.

Resin is a key input material to the manufacture of our products and System One cartridge. Oil prices affect both the pricing and availability of this material. Escalation of oil prices could affect our ability to obtain sufficient supply of resin at the prices we need to manufacture our products at current rates of profitability.

We currently source resin from a small number of suppliers. Rising oil prices over the last several years have resulted in significant price increases for this material. We cannot guarantee that prices will not continue to increase. Our contracts with customers restrict our ability to immediately pass on these price increases, and we cannot guarantee that future pricing to customers will be sufficient to accommodate increasing input costs.

Distribution costs represent a significant percentage of our overall costs, and these costs are dependent upon fuel prices. Increases in fuel prices could lead to increases in our distribution costs, which, in turn, could impair our ability to achieve profitability.

We currently incur significant inbound and outbound distribution costs. Our distribution costs are dependent upon fuel prices. Increases in fuel prices could lead to increases in our distribution costs, which could impair our ability to achieve profitability.

We have labor agreements with our production employees in Italy and in Mexico. We cannot guarantee that we will not in the future face strikes, work stoppages, work slowdowns, grievances, complaints, claims of unfair labor practices, other collective bargaining disputes or in Italy, anti-union behavior, that may cause production delays and negatively impact our ability to deliver our products on a timely basis.

MDS Italy has a national labor contract with Contratto collettivo nazionale di lavoro per gli addetti all’industria della gomma cavi elettrici ed affini e all’industria delle materie plastiche, and MDS Mexico has entered into a collective bargaining agreement with a Union named Mexico Moderno de Trabajadores de la Baja California C.R.O.C. Medisystems has not to date experienced strikes, work stoppages, work slowdowns, grievances, complaints, claims of unfair labor practices, other collective bargaining disputes, or in Italy, anti-union behavior, however we cannot guarantee that we will not be subject to such activity in the future. Any such activity would likely cause production delays, and negatively affect our ability to deliver our production commitments to customers, which could adversely affect our reputation and cause our combined businesses and operating results to suffer. Additionally, some of our key single source suppliers have labor agreements. We cannot guarantee that we will not have future disruptions, which could adversely affect our reputation and cause our business and operating results to suffer.

We do not have long-term supply contracts with many of our third-party suppliers.

We purchase raw materials and components from third-party suppliers, including some single source suppliers, through purchase orders and do not have long-term supply contracts with many of these third-party suppliers. Many of our third-party suppliers, therefore, are not obligated to perform services or supply products for any specific period, in any specific quantity or at any specific price, except as may be provided in a particular purchase order. We do not maintain large volumes of inventory from most of our suppliers. If we inaccurately forecast demand for finished goods, our ability to meet customer demand could be delayed and our competitive position and reputation could be harmed. In addition, if we fail to effectively manage our relationships with these

suppliers, we may be required to change suppliers, which would be time consuming and disruptive and could lead to disruptions in product supply, which could permanently impair our customer base and reputation.

Certain of our products are recently developed and we have recently transitioned the manufacturing of certain of these products to new locations. We, and certain of our third party manufacturers, have limited manufacturing experience with these products.

We continue to develop new products and make improvements to existing products. We have also recently relocated the manufacture of certain of our products to Mexico. As such, we and certain of our third party manufacturers, have limited manufacturing experience with certain of our products, including key products such as the PureFlow SL, related disposables and our Streamline. We are, therefore, more exposed to risks relating to product quality and reliability until the manufacturing processes for these new products mature.

Risks Related to Intellectual Property

If we are unable to protect our intellectual property and prevent its use by third parties, we will lose a significant competitive advantage.

We rely on patent protection, as well as a combination of copyright, trade secret and trademark laws to protect our proprietary technology and prevent others from duplicating our products. However, these means may afford only limited protection and may not:

	§		prevent our competitors from duplicating our products;

	§		prevent our competitors from gaining access to our proprietary information and technology; or

	§		permit us to gain or maintain a competitive advantage.

Any of our patents, including those we license, may be challenged, invalidated, circumvented or rendered unenforceable. We cannot provide assurance that we will be successful should one or more of our patents be challenged for any reason. If our patent claims are rendered invalid or unenforceable, or narrowed in scope, the patent coverage afforded our products could be impaired, which could make our products less competitive.

As of September 30, 2008, we had 44 pending patent applications, including foreign, international and U.S. applications, and 35 U.S. and international issued patents. Under our license agreement with DSU Medical Corporation, we also license approximately 50 pending patent applications, including foreign, international and U.S. applications, and approximately 90 U.S. and international issued patents. We cannot specify which of these patents individually or as a group will permit us to gain or maintain a competitive advantage. We cannot provide assurance that any pending or future patent applications we hold will result in an issued patent or that if patents are issued to us, that such patents will provide meaningful protection against competitors or against competitive technologies. The issuance of a patent is not conclusive as to its validity or enforceability. The United States federal courts or equivalent national courts or patent offices elsewhere may invalidate our patents or find them unenforceable. Competitors may also be able to design around our patents. Our patents and patent applications cover particular aspects of our products. Other parties may develop and obtain patent protection for more effective technologies, designs or methods for treating kidney failure. If these developments were to occur, it would likely have an adverse effect on our sales.

The laws of foreign countries may not protect our intellectual property rights effectively or to the same extent as the laws of the United States. If our intellectual property rights are not adequately protected, we may not be able to commercialize our technologies, products or services and our competitors could commercialize similar technologies, which could result in a decrease in our revenues and market share.

Our products could infringe the intellectual property rights of others, which may lead to litigation that could itself be costly, could result in the payment of substantial damages or royalties, and/or prevent us from using technology that is essential to our products.

The medical device industry in general has been characterized by extensive litigation and administrative proceedings regarding patent infringement and intellectual property rights. Products to provide kidney replacement therapy have been available in the market for more than 30 years and our competitors hold a significant number of patents relating to kidney replacement devices, therapies, products and supplies. Although no third party has threatened or alleged that our products or methods infringe their patents or other intellectual property rights, we cannot provide assurance that our products or methods do not infringe the patents or other intellectual property rights of third parties. If our business is successful, the possibility may increase that others will assert infringement claims against us.

Infringement and other intellectual property claims and proceedings brought against us, whether successful or not, could result in substantial costs and harm to our reputation. Such claims and proceedings can also distract and divert management and key personnel from other tasks important to the success of the business. In addition, intellectual property litigation or claims could force us to do one or more of the following:

	§		cease selling or using any of our products that incorporate the asserted intellectual property, which would adversely affect our revenues;

	§		pay substantial damages for past use of the asserted intellectual property;

	§		obtain a license from the holder of the asserted intellectual property, which license may not be available on reasonable terms, if at all and which could reduce profitability; and

redesign or rename, in the case of trademark claims, our products to avoid infringing the intellectual property rights of third parties, which may not be possible and could be costly and time-consuming if it is possible to do so.

Confidentiality agreements with employees and others may not adequately prevent disclosure of trade secrets and other proprietary information.

In order to protect our proprietary technology and processes, we also rely in part on confidentiality agreements with our corporate partners, employees, consultants, outside scientific collaborators and sponsored researchers, advisors and others. These agreements may not effectively prevent disclosure of confidential information and trade secrets and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may independently discover or reverse engineer trade secrets and proprietary information, and in such cases we could not assert any trade secret rights against such party. Costly and time consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive position.

We may be subject to damages resulting from claims that our employees or we have wrongfully used or disclosed alleged trade secrets of other companies.

Many of our employees were previously employed at other medical device companies focused on the development of dialysis products, including our competitors. Although no claims against us are currently pending, we may be subject to claims that these employees or we have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. If we fail in defending such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights. Even if we are successful in defending against these claims, litigation could result in substantial costs, damage to our reputation and be a distraction to management.

Risks Related to our Common Stock

Our stock price is likely to be volatile, and the market price of our common stock may drop.

The market price of our common stock could be subject to significant fluctuations. Market prices for securities of early stage companies have historically been particularly volatile. As a result of this volatility, you may not be able to sell your common stock at or above the price you paid for the stock. Some of the factors that may cause the market price of our common stock to fluctuate include:

	§		timing of market acceptance of our products;

	§		timing of achieving profitability and positive cash flow from operations;

	§		changes in estimates of our financial results or recommendations by securities analysts or the failure to meet or exceed securities analysts’ expectations;

	§		actual or anticipated variations in our quarterly operating results;

	§		future debt or equity financings;

	§		developments or disputes with key vendors or customers;

	§		disruptions in product supply for any reason, including product recalls, our failure to appropriately forecast supply or demand, difficulties in moving products across the border, or the failure of third party suppliers to produce needed products or components;

	§		reports by officials or health or medical authorities, the general media or the FDA regarding the potential benefits of the System One or of similar dialysis products distributed by other companies or of daily or home dialysis;

	§		announcements by the FDA of non-clearance or non-approval of our products, or delays in the FDA or other foreign regulatory agency review process;

	§		product recalls;

	§		regulatory developments in the United States and foreign countries;

	§		changes in third-party healthcare reimbursements, particularly a decline in the level of Medicare reimbursement for dialysis treatments;

	§		litigation involving our company or our general industry or both;

	§		announcements of technical innovations or new products by us or our competitors;

	§		developments or disputes concerning our patents or other proprietary rights;

	§		our ability to manufacture and supply our products to commercial standards;

	§		significant acquisitions, strategic partnerships, joint ventures or capital commitments by us or our competitors;

	§		departures of key personnel; and

investors’ general perception of our company, our products, the economy and general market conditions.

The stock markets in general have experienced substantial volatility that has often been unrelated to the operating performance of individual companies. These broad market fluctuations may adversely affect the trading price of our common stock. In the past, following periods of volatility in the market price of a company’s securities, stockholders have often instituted class action securities litigation against those companies. Such litigation, if instituted, could result in substantial costs and diversion of management attention and resources, which could significantly harm our profitability and reputation.

Anti-takeover provisions in our restated certificate of incorporation and amended and restated bylaws and under Delaware law could make an acquisition of us more difficult and may prevent attempts by our stockholders to replace or remove our current management.

Provisions in our restated certificate of incorporation and our amended and restated bylaws may delay or prevent an acquisition of us. In addition, these provisions may frustrate or prevent attempts by our stockholders to replace or remove members of our board of directors. Because our board of directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our stockholders to replace current members of our management team. These provisions include:

	§		a prohibition on actions by our stockholders by written consent;

	§		the ability of our board of directors to issue preferred stock without stockholder approval, which could be used to institute a “poison pill” that would work to dilute the stock ownership of a potential hostile acquirer, effectively preventing acquisitions that have not been approved by our board of directors;

	§		advance notice requirements for nominations of directors or stockholder proposals; and

	§		the requirement that board vacancies be filled by a majority of our directors then in office.

In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner. These provisions would apply even if the offer may be considered beneficial by some stockholders.

If there are substantial sales of our common stock in the market by our existing stockholders, our stock price could decline.

If our existing stockholders sell a large number of shares of our common stock or the public market perceives that existing stockholders might sell shares of common stock, the market price of our common stock could decline significantly. We have 46,489,299 shares of common stock outstanding as of October 30, 2008. Shares held by our affiliates may only be sold in compliance with the volume limitations of Rule 144. These volume limitations restrict the number of shares that may be sold by an affiliate in any three-month period to the greater of 1% of the number of shares then outstanding, which approximates 464,893 shares, or the average weekly trading volume of our common stock during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale.

At October 30, 2008, subject to certain conditions, holders of an aggregate of approximately 24,280,888 shares of our common stock have rights with respect to the registration of these shares of common stock with the Securities and Exchange Commission, or SEC. If we register their shares of common stock following the expiration of the lock-up agreements, they can sell those shares in the public market.

As of September 30, 2008, 7,126,074 shares of common stock are authorized for issuance under our stock incentive plan, employee stock purchase plan and outstanding stock options. As of September 30, 2008, 5,367,504 shares were subject to outstanding options, of which 2,592,680 were exercisable and which can be freely sold in the public market upon issuance, subject to the restrictions imposed on our affiliates under Rule 144.

Our costs have increased significantly as a result of operating as a public company, and our management is required to devote substantial time to comply with public company regulations

As a public company, we incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, as well as new rules subsequently implemented by the SEC and the NASDAQ Global Market, have imposed various new requirements on public companies, including changes in corporate governance practices. Our management and other personnel now need to devote a substantial amount of time to these new requirements. Moreover, these rules and regulations increase our legal and financial compliance costs and make some activities more time-consuming and costly.

In addition, the Sarbanes-Oxley Act requires, among other things, that we maintain effective internal controls for financial reporting and disclosure controls and procedures. In particular, we must perform system and process evaluation and testing of our internal controls over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Our compliance with Section 404 will require that we incur substantial accounting expense and expend significant management efforts. By the end of this year, our independent registered public accounting form must report on the effectiveness of our internal controls over financial reporting for the businesses we acquired in the Medisystems Acquisition. If we are not able to comply with the requirements of

Section 404 in a timely manner, or if we or our independent registered public accounting firm identify deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject to sanctions or investigations by the NASDAQ Global Market, SEC or other regulatory authorities.

We do not anticipate paying cash dividends, and accordingly stockholders must rely on stock appreciation for any return on their investment in us.

We anticipate that we will retain our earnings for future growth and therefore do not anticipate paying cash dividends in the future. As a result, only appreciation of the price of our common stock will provide a return to investors. Investors seeking cash dividends should not invest in our common stock.

Our executive officers, directors and current and principal stockholders own a large percentage of our voting common stock and could limit new stockholders’ influence on corporate decisions or could delay or prevent a change in corporate control.

Our directors, executive officers and current holders of more than 5% of our outstanding common stock, together with their affiliates and related persons, beneficially own, in the aggregate, approximately 65% of our outstanding common stock. David S. Utterberg, one of our directors, holds approximately 20% of our outstanding common stock. As a result, these stockholders, if acting together, may have the ability to determine the outcome of matters submitted to our stockholders for approval, including the election and removal of directors and any merger, consolidation or sale of all or substantially all of our assets and other extraordinary transactions. The interests of this group of stockholders may not always coincide with our corporate interests or the interests of other stockholders, and they may act in a manner with which you may not agree or that may not be in the best interests of other stockholders. This concentration of ownership may have the effect of:

	§		delaying, deferring or preventing a change in control of our company;

	§		entrenching our management and/or Board;

	§		impeding a merger, consolidation, takeover or other business combination involving our company; or

	§		discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of our company.

We may grow through additional acquisitions, which could dilute our existing shareholders and could involve substantial integration risks.

As part of our business strategy, we may acquire other businesses and/or technologies in the future. We may issue equity securities as consideration for future acquisitions that would dilute our existing stockholders, perhaps significantly depending on the terms of the acquisition. We may also incur additional debt in connection with future acquisitions, which, if available at all, may place additional restrictions on our ability to operate our business. Acquisitions may involve a number of risks, including:

	§		difficulty in transitioning and integrating the operations and personnel of the acquired businesses, including different and complex accounting and financial reporting systems;

	§		potential disruption of our ongoing business and distraction of management;

	§		potential difficulty in successfully implementing, upgrading and deploying in a timely and effective manner new operational information systems and upgrades of our finance, accounting and product distribution systems;

	§		difficulty in incorporating acquired technology and rights into our products and technology;

	§		unanticipated expenses and delays in completing acquired development projects and technology integration;

	§		management of geographically remote units both in the United States and internationally;

	§		impairment of relationships with partners and customers;

	§		customers delaying purchases of our products pending resolution of product integration between our existing and our newly acquired products;

	§		entering markets or types of businesses in which we have limited experience;

	§		potential loss of key employees of the acquired company; and

	§		Inaccurate assumptions of acquired company’s product quality and/or product reliability.

As a result of these and other risks, we may not realize anticipated benefits from our acquisitions. Any failure to achieve these benefits or failure to successfully integrate acquired businesses and technologies could seriously harm our business.

Purchase accounting treatment of acquisitions could decrease our net income in the foreseeable future, which could have a material and adverse effect on the market value of our common stock.

Under U.S. generally accepted accounting principals, we account for acquisitions using the purchase method of accounting. Under purchase accounting, we record the consideration issued in connection with the acquisition and the amount of direct transaction costs as the cost of acquiring the company or business. We allocate that cost to the individual assets acquired and liabilities assumed, including various identifiable intangible assets such as acquired technology, acquired trade names and acquired customer relationships

based on their respective fair values. Intangible assets generally will be amortized over a three to fifteen year period. Goodwill and certain intangible assets with indefinite lives are not subject to amortization but are subject to at least an annual impairment analysis, which may result in an impairment charge if the carrying value exceeds their implied fair value. These potential future amortization and impairment charges may significantly reduce net income, if any, and therefore may adversely affect the market value of our common stock.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

On May 28, 2008 and August 1, 2008, we issued an aggregate of 9,555,556 shares of its common stock and 1,911,111 shares of our common stock that are issuable upon exercise of warrants to certain investors in connection with a private placement of common stock and warrants. The offer and sale was made without any public offering or solicitation, and was exempt under Section 4(2) of the Securities Act of 1933, as amended, or Rule 506 of Regulation D promulgated there under. No advertising or general solicitation was employed in offering the securities, the offerings and sales were made to a limited number of accredited investors and we restricted transfer of the securities in accordance with the requirements of the Securities Act. The recipients of the securities represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends were affixed to the instruments issued in such transaction.

Item 6.Exhibits


Exhibit
Number
*31.1		Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14 or 15d-14, as adopted pursuant to Section 302 of Sarbanes-Oxley Act of 2002.

*31.2		Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14 or 15d-14, as adopted pursuant to Section 302 of Sarbanes-Oxley Act of 2002.

*32.1		Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(b) or 15d-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002.

*32.2		Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(b) or 15d-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002.


*		Filed herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	NXSTAGE MEDICAL, INC.
	By:	/s/ Robert S. Brown
		Robert S. Brown
		Chief Financial Officer (Duly authorized officer and principal financial and accounting officer)

November 5, 2008

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. sophomore Avg

NxStage Medical 10-Q2008 Q3 Quarterly report

Content analysis